Q2 2020 Intact Financial Corp Earnings Call
At this time I would like to want everyone to the intact Financial Corporation.
Second quarter 2020 results conference call.
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I would like to turn the call over to can understand senior Vice President Investor Relations and corporate development for opening remarks. Please go ahead Sir.
Thank you Carl good morning, everyone. Thank you for joining the call today linked to our live webcast and published information for this call is posted on our website intact that Si dot com under the investors tab.
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 on the use of non <unk> financial measures unimportant notes on adjustments terms and definition used in this presentation.
Once again, our executives join us virtually today from across the country in Toronto, We have our C O Charles Britain to more with me here in Montreal or do we market CFO Isabella Gerard SVP of personal lines and Patrick Barbell SVP of claims and from Calgary, We're joined by Darren Godfrey SVP of commercial.
Well begin with prepared remarks, followed by Q1 night with that I'll turn the call to our CEO towards Brendan more.
[music] good morning, everyone. Thank you for joining us today Jan Thanks for the introduction.
That cobot 19, and then they continues to be significant impact on society.
Healthcare professionals and essential workers have done a tremendous job on the front line.
All government.
Move fast on many fronts.
Despite these efforts there is still uncertainty as to how long the crisis will persist.
So businesses have an important role to play here in supporting their communities I think cope with it can I make and seidl impacts.
We have stepped up to support minions up Canadian through relief community support.
And being very good and bad times, and it's more important than ever that we work together to get through this.
We entered the crisis in a position of strength, which has enabled us to support our customers.
We've provided more than $315 million of relief to over a million bulk fuel there's across North America.
Our release continues to be rich space and need space and will evolve as the situation develops.
Speaking of strength.
Yesterday evening, we announced second quarter net operating income of $2 and 35 per share an increase of 63% over Q2 2019.
The team delivered solid results, despite navigating a difficult environment and accelerating investments and our people and technology, all that while providing relief across all our customer base in North America.
Topline growth was 7% in the quarter with 6% in Canada, and a robust 10% in the U.S.
I see growth in the quarter was impacted by four points of written premium really.
The overall combined ratio was 89.5% which trends on both sides of the border.
Argued the ultimate direct cost of covert 19 has not changed since Q1 as we've seen no evidence to warrant the change to our prudent Q1 bottom up policy by policy.
Reserving to ultimate losses.
In Canada, the combined ratio of 89% were strong driven by underlying performance well U.S. commercial lines delivered a solid 93.2%.
Let's now look at our results by line of business, starting with Canada.
Personal auto growth was solid at 3% given we've provided seven points of relief in the quarter itself.
In the next quarter that isn't you tree, we expect the impact from Premier relief to be in the low double digit range.
Combined ratio in the quarter was strong at 84.7% given the work we've done in the past three years, which meaningfully impacted our mix of business. In addition to redo is driving during the quarter.
The benefit from reduced driving was partially upset by a portion of premium relief that was earned during the quarter.
Looking to the coming quarters, the remaining relief will roll through net earned premium well, we expect driving activity to gradually return to normal.
From an underwriting standpoint since the start of cold did.
We largely expect relief and driving activity to upset each other over time.
Overall, the fundamentals in personal auto are strong.
In personal property premiums grew a strong 11% driven by favorable market conditions that GC any acquisition and unit growth.
The combined ratio at 88.6%, what's the best Q2 in over a decade, driven by our profitability actions overtime.
And mild weather conditions.
Personal property continues to be a solid contributor to our strong underwriting performance overall.
And I'm confident this will continue.
In commercial lines premium growth up 7% reflects the GE Si any acquisition and was tempered by the economic slowdown and our multiple relief measures.
The combined ratio of 95.1% reflected strong underlying performance offset by lower prior year development.
The underlying loss ratio improved 5.5 points year over year.
We're already seeing pricing momentum return and I expect us to outbreak this business close to 90% going forward.
Moving to our U.S. commercial segment premiums grew a strong 10% what robust organic growth.
Across most lines.
The underlying loss ratio improved 4.8 points driven by our ongoing profitability improvement game plan.
The combined ratio at 93.2% was strong as this segment continues to trend towards our sustainable low Ninetys objective.
Let's turn to the industry outlook.
The prevailing hard market conditions, we experienced in Canada, and 29 scene and into early 2020, I've been impacted by the crisis.
Rate increases in both personal and commercial lines.
Were tempered to help our customers navigate what is a very difficult economic environment.
In the coming months as activity moves back towards normal we expect the industry to return to the corrective measure is required.
Restore it's our are we to historical levels.
In the near term the trends that have emerged in the past few months will likely exacerbate the industries need for rates, given lower reinvestment yields economy intact and potential loss exposure likely to arrive arise from the crisis.
In the U.S., we see similar trends supporting the hardening market conditions.
Looking at the rest of 2024 I have seen the crisis is expected twin pack topline growth in the mid single to low double digit range.
Given the strength of our operations entering the crisis.
I expect our underwriting performance for the rest of 2020 to be on track.
While managing the crisis and providing relief as been all consuming in the past few months, we haven't lost the beat on the strategic front.
The teams across North America delivered and accelerated initiatives to ensure that we expand our leadership position.
As you know our roadmap for the next decade is rooted on extending our leadership here in Canada building the best specialty insurer in North America.
Since forming our competitive advantages and ensuring that our people win in this changing world and while progress in the near term is important.
The key question for US now is how will the future beep permanently altered as a result of call. It 90.
So for consumers argues that value for money ease of access and strong digital engagement will become even more important.
Our breadth of products brands and distribution channels.
Right Optionality.
For us to emphasize these changing expectations.
We've made great meets on the digital Nei front in the past few years.
These out of accelerated in the past few months, our intent is to double down on our digital edge.
Or businesses, we believe that they will be an increasing differentiation between small.
And mid sized businesses.
So we intend to build our leadership with more than one for small businesses in Canada to simplify and make it easier for them to access our products.
Our midsize businesses, we intend to better differentiate our offer and broadened the range of services to those.
Our rapid expansion in specialty lines and the acquisition of GCN in Frank Cowen.
Give us the protect platform to win for these businesses across North America.
Finally, this crisis will exacerbate the income and skilled disparity that exist in society.
We're stepping up our efforts and the communities, where we operate would be an agent that change and a force for good.
We're also ensuring that our people across North America will adapt and gain from this changing world.
We're committed to investing in adapting our people skills to our needs up tomorrow and we're also committed to continue to ensure that our environment as one of the most inclusive.
So we intend to integrate these.
Trends and initiatives with our 10 year strategic roadmap in the coming months.
Our aim is to position ourselves to excel in a post go get environment and come out of this crisis stronger and even more resilient.
So in conclusion this quarter was a testament to our business trends, we ended the quarter with a robust capital margin ready to absorb severe shocks and invest in strategic unfortunate fees.
Our operating our we yes moved into the right zone and our book value is up 8% year over year any turbulent environment.
Business is very resilient and we're well positioned to continue to beat our financial objectives in the quarters and years ahead.
I would that I'll turn the call over to our CFO we market.
Thanks, Charles and good morning, everyone.
Net operating income per share was $2 35 up 63% versus last year, driven by strong underwriting performances across North America.
Before turning to our Q2 operating results, let me share a few points related to the cobot 19, pandemic, which continues to impact communities in our markets and around the globe.
We have provided significant relief totaling more than $350 million to our customers.
Included in this amount is $263 million premium reductions of which 134 million was written in the quarter impacting our top line by four points.
Although these measures are meant to compensate customers for the lower driving activity observed in Q2.
Topline impact will continue to be felt in future quarters as their belief is earned.
In terms of corporate related losses, we have not changed our best estimate of $83 million booked in Q1. However, we took a prudent approach on bad debt due to the economic uncertainty and recorded a $34 million provision in Q2 2020, most of it in Canada.
This represents approximately a 1.4 point impact to the expense ratio across our three lines of businesses in Canada.
Overall, we expect the crisis to impact the topline in the mid single to low double digit range for the rest of 2020.
From an underwriting perspective, the impact of the crisis is expected to be neutral for the rest of the year, although it may vary by quarter and by line of business.
Now turning to our operating results.
Net investment income of $141 million was down 5% compared to last year.
This was mainly due to lower reinvestment yields and lower dividend income.
Partially offset by higher invested assets from the GCN They acquisition.
Assuming the U.S. dollar and interest rates stay where they are we continue to expect investment income in 2020 to grow between one and 3% compared to 2019.
Distribution EBITDA and other income grew 8% to $78 million in the quarter, driven by both acquisitions and organic growth.
Although there remains uncertainty surrounding the length and severity of the crisis. We expect the growth of these earnings for the full year to be in the high single to low double digit range.
Now let me provide some additional detail on the underwriting results beginning with Canada.
In personal auto profitability was solid in this in the second quarter at 84.7% the underlying current year loss ratio improved 13 points driven by a combination of lower driving activity, whether weather conditions and our ongoing profitability actions.
All of which were partially offset by higher severity and relief.
Prior year development was muted in the quarter and although Q2 is typically a seasonally favorable quarter.
Losses were three points above historical averages due to severe weather events in Alberta.
In personal property, the combined ratio improved 11 points, driven by our profitability actions better weather and fewer fire losses.
On the other hand, the expense ratio increased 2.4 points driven by a bad debt provision and higher variable commissions due to our strong underwriting performance.
Overall personal property continues to deliver a strong performance.
In our Canadian commercial lines, we saw premium growth of 11% in Q2, if we exclude the impact of premium release, the combined ratio of 95.1% reflected a solid improvement of 5.5 points in the underlying performance, which was offset by elevated cat losses, lower favorable prior year development and higher.
<unk> expenses.
Overall, the Canadian expense ratio of 32.2% for the quarter increased 3.7 points from last year.
Mainly driven by an increase in the provision for bad debts as mentioned earlier and higher commissions.
Turning to US commercial growth was 10% in constant currency with strong organic growth in most lines of business as Rick momentum and unit growth continues.
The underlying loss ratio of 53% in the quarter improved 4.8 points, which was largely driven by the impact of our profitability actions.
The cat loss ratio when you asked a 1.7% in the quarter was entirely weather related with no covered losses recorded in the quarter.
The increase in the U.S. expense ratio to 39.4% is consistent with our expectations and is mainly due to the addition of GCN A's surety business.
All in I'm pleased with the performance in the U.S.
On a consolidated base level. There is no doubt our business has delivered solid operating results and led to an operating our we have 15.6% 300 basis points above that reported in the 2019 calendar year.
Now looking at our balance sheet, we ended the quarter and strong financial position with a total capital margin of 1.7 billion and a debt to total capital ratio at 22.1% we remain on track to reach our 20% target over the next 12 to 18 months. We also have $300 million of cash at the holding company and there are 750 million credits.
Realty is entirely on drawn.
Our book value per share increased 4% since since March 30, Onest to 50, 395, thanks to solid earnings and favorable capital markets, but offset by losses related to our pension plans.
Overall, we've maintained a strong balance sheet throughout the crisis and I am confident it's going to absorb severe shocks or help us capture growth opportunities that may arise in these turbulent times.
In closing I would like to thank our teams across North America for stepping up for customers suppliers and shareholders as we navigate through uncharted territory.
Have shown an extreme agility and flexibility to maintain their operations and top shape and delivered solid results.
Finally, with our resilient operations talented teams and strong capital position, we continue to be able to support our customers throughout this crisis with strong fundamentals across our business on both sides of the border. We're confident that our underwriting performance will be on track for the remainder of 2020.
With that I'll turn the call back to Ken Thank you Louie.
To give everyone a chance to participate in the queue and they we would ask that you kindly limit yourselves to two questions per person at this time at the end do you can certainly re queue for a follow up.
Carl we're now ready to take questions.
Thank you.
I Wonder you May press Star one on your telephone to ask a question to withdraw your question. Please press the pound or hash key.
Our first question. This morning comes from Jeff Kwan from RBC capital markets. Please go ahead.
Hi, good morning.
I know you talked about not changing your claims provisions relating to cope with 19, but can you talk about.
How many.
Business interruption claims received so far in like the aggregate dollar amount that's that's been claims.
Yes.
Good morning.
Good morning, Jeff I'll ask that take to take this one and if theres anything to add Darrin can chip in as well, but thats like why don't you run with that.
Yep.
So.
Maybe first of all on business interruption claims for see our view as not change on this during Q2 following our discussions we added the end of Q1 like to remind that the language in our policies is very clears the business interruption coverage requires direct physical damage from uninsured apparel to be triggered.
This is the case for 99.5% of our policies in commercial lines. There is only of.
In very exceptional circumstances that we have provided limited business interruption coverage that can be triggered by a pandemic.
For the most part by the way all claims related to add these a limited exceptions that been received and settled so paid and close the as we speak.
So not nothing out of remaining uncertainty around that I should say, but as expected some groups of Insureds and law firms have initiated litigation in Canada and no other and in other jurisdictions as well to a in an attempt to challenge just a interpretation, but we are we continue to be very confident.
With our defense arguments and various levels of defense. We have one of the main development. During Q2 is that a few decisions actually have started to be rendered on VI litigations.
The case as an example of a two federal court decisions in the states one in Michigan and one in New York.
That's our relating to award things almost identical to ours.
Both of those decisions that come from that one physical damage to the property is necessary to three gur VI coverage into that depend to make itself or a government mandated closer of businesses cannot be considered as physical damage.
To the premises so here in Canada, and none of these class action motions that been certified yet.
But we are actively preparing our defense and I'm very confident with our position now we have received a number of that individual businesses. That's up filed for business interruptions and we have explain individually to each of them our position of coverage and why coverage.
Not apply I don't have the exact number but that.
Yes, we have seen that's overall on VI very confident in our numbers and that's why we haven't changed the 83 million overall.
Yeah, and I think I think the other thing Thats important here is that the $83 million of reserve was not just.
And you've got liability and entertainment.
Type claims and I would say, Jeff you know we've done such a rigorous analysis in Q1 doing a bottom up policy by policy assessment of what might be.
Kobin direct related claims that.
Things are.
What we've seen in terms of activity as let us do not change our view of the ultimate.
At this stage.
I think to provide color ballpark.
Out of the provision Weve put.
What how much actual casing incurred.
Have we seen by case incurred guys. We mean filed by file that I've actually been received so.
Ballpark for the group Patrick.
Yes, roughly if I combine both Canada and US we're talking about just under 30 million so far and on all the reported claims directly linked to cope with.
At the moment, 80% of them already paid in flows within that 30 million.
So we've got a decent visibility I think three four months in.
The case incurred.
Gives us a sense that our ultimate assessment.
It's very good and and we're ready for more clearly.
With a provision at 83 million.
So that's where we stand Darrin I don't know if theres anything else you can add here.
I think the I think I, you said Charlie's that the activity. We're seeing today is very much consistent with that bottom up exercise, there's no real surprises of up mixes from coverage or anything else like that so very consistent so that for me. It gives us more comfort around EUR 83 million dollar ultimate you.
Yes, and maybe just got a bit of color to Pat. Thanks.
Point on us decisions, we've talked in the previous quarter that.
Our language was also very well supported by common law here in Canada and previous court decisions here in Canada.
And the decisions we've seen in the west would be consistent with the common law, we have seen here as well.
And Jeff did I hear.
You are.
Yes, I can just clarify because when you win Patrick talked about the us.
Decisions and the wave is kinda despite because I think you guys talked about it it's quite explicit around 10 demicks are not covered.
I just want to it sounds like.
You see.
We're seeing wise.
Yes court decisions.
We're relating to policies that had similar warning to what you have in Canada.
Yes, hopefully different things right is that correct.
Yeah. The debate here like the virus exclusion is is the second third line of defense the real debate in VI is direct physical damage.
And our language on that front compares a very comparable to the language in the U.S. and Thats, where the debate is in courts, it's not as to whether you have an exclusion or not.
And in that regard we're saying.
The court decisions are very clear they're in line with what we expect they're in line with the common law in this in Canada, snobby, it's not great, but it's kind of.
Pretty straight forward than I think the courts air in that direction.
Exactly shot I wouldn't even add the you know in the Michigan decision to judge actually.
Limited his decision to the first line of defense commencing on the physical damage and stated that didn't have to even consider.
The other line because it was clear in his view that physical damage was required.
Yes.
As you know in Canada, we have other lines of defense in the product as well we've got two additional lines of defense and so.
All in sitting here today, we feel.
Even more confident than we did at the end of Q1.
We were very confident that the end of Q1 about the clarity of our product and.
And.
That's it.
Okay. Thanks.
Yep.
Okay, sorry, just my second question was just on.
Bad debt expense.
Some clarity I know you mentioned it was mostly in Canada, but just where about its which lines of businesses or any sort of color around that and how that might play out in upcoming quarters. In other words is it more of a one off for just linger a little bit, albeit a smaller now.
Yeah, I'll ask suite to give you a his perspective, our thought process is to front load.
Our assessment of ultimate as much as possible, saying, we we've done for the Q1.
Reserve So what we go ahead.
Sure. So essentially it's been spread over at premiums and this is where shared about 1.4 points of impact for each line of business in the Canadian market space, which is where most of the Parisian was made for so you can spread it accordingly.
And then from a from a.
How that's going to find out here our view was to take a strong sense in Q2, knowing that theres a lot of uncertainty.
In the marketplace right now we've given a lot of released where customers to facilitate durability durability to pay for the coverage and but as the with the government relief Unwinds people have to pay the deal does the the delays are expiring we're expecting some some headwinds there. So we start to provide as much as we go.
Good for that in Q2, and our hope here is that we're not going to use as much as we've provided for in future quarters, but at this point, that's our best view of where the cost could be overall based on what we're seeing in terms of our data.
And our intelligence on the in their relationship with the customers.
I think Jeff one one data point that I.
I was.
Impressed with is the fact that.
When people ask for help.
It is because they need it and.
80% of of of.
People that that I've asked for a payment deferral.
Paid the second payment.
And so only 20% of people that I've asked for help add delayed more than one payment.
And obviously the bad debt provision, even though we've given a lot of financing relief.
That provision is aimed.
So those that have deferred payment 345 sites.
But the vast majority of people.
I think thats very seriously and and have stepped up to stay on track in terms of.
Paying their insurance.
And so it can be very clear, we took a bit to center approach as we did in Q1 for the last revisions we've been prudence here and the expectation is this is what.
Could be needed and we don't expect that need to add more or less really.
Something really bad would happen.
I think were good here.
Okay. Thank you.
Our next question comes from Brian Meredith from me, Yes.
Go ahead.
Yes. Thanks, a couple of questions here first one weighted personal auto insurance one.
Thank you talk a little bit what are we seeing right now trend in what's going on with miles driven in Canada in frequency and is there any offsets on severity and then I'll follow up.
Yep.
Yeah, Brian I think Thats. The key question, we've seen a.
Starting in the second half of April a gradual increase in driving.
And from a severity point of view, you've got couple of things happening one is.
And this always happens when your mix of claims ships because your frequency drops.
The nature of claims changes and this has an impact on severity and then there was very to start with I'll ask is that then to give her perspective.
On on what she is observing and where we think we stand now.
Sure.
So in terms of that change in miles driven we've been using our telematics tools, though are you be I am data.
To follow on a regular be this.
Much of that give them at their driven what we're done by our customers as well as the number of trips. So that was it'll we you during the crisis to monitor things were evolving. So so what we say that for sure a big drop in driving at the peak of the crisis or leave pool, but.
Since then.
We see that the boat that get them at their driven and then number up to it.
Increasing gradually actions that moment overtime. So so I would say at this time, we still see that did it below that same and level at the same for you end up time last year, the when not fully back to what we would see no mode driving but.
Clearly this has been increasing since mid mid April.
So it's like.
Every week at picking up again year over year, you know you're in the team.
In terms of difference.
Brian and then of course the severity, we'll we'll let that the accordingly, you have any comments on severity you want to make has that been or.
Yes, maybe on say very TB that John mentioned, we see it changes, they're very happy due to the change of mix in claims we received during the crisis Wild Quincy what was the word and this is mainly due because we see less of that small likes. It then since there is no you your burn that traffic.
Let's try I think in that city. So in that brand that's fine we were seeing live.
Small accident, that's why not.
Right.
And sorry, Brian in practice, so when you run with that then you ask yourself, okay. So severity looks different the way we've looked at at results.
It's also tried to anticipate and be cautious with.
The bodily injury type.
Yes impact and so make sure that we took a cautious stance in the quarter.
Got it makes sense and then as a follow up to that.
I guess, given what's going on right now Charles what makes you confident that we're going to see a return to kind of affirming our hard market in personal auto when we get through this crisis and do you anticipate any regulatory pushback or making it harder to kind of get that type of a rate.
Well I think that.
This is a fluid environment. It is changing every week.
And we will adapt.
Our not only are relief measures, but our pricing actions based on what we're seeing in the environment and make sure that our performance remains remains on track I.
I think that we've been working with governments to address the root cause.
Of the product.
Brian were it wasn't inflation coming into this there is inflation coming out of this and root cause of issues and automobile insurance, Ontario, being a good example, alberta as well still need to be addressed.
And we'll work with elected officials and regulators to make sure that we start turning our attention.
Reforms I think that look if there is permanently less driving in less accidents and assist that rates will reflect that overtime.
From from my point of view, but.
To the extent that the root cause of the product is not so and the fact that the industry is combined ratio was north of 100%.
In auto coming in the crisis I don't see why rate corrections.
Should not continue no theres less driving the rate correction need will not be as big.
What matters to us as we keep operating the business within the box, we've given ourselves from a profitability point of view, an automobile insurance and give as much relief as we can.
When driving in frequency is out of the norm.
Thank you.
Our next question comes from Paul Holden from Sea IVC. Please go ahead.
Good morning.
Morning fall.
Even with the theme of personal auto when asked a question on.
Uninsured risks now if I go by pre Cove, Ed I would've expected impact to start gaining some market share. This year in terms of volumes and I think you kind of guided to that expectation as well.
If I look at Britain insured risk trends is roughly flat year over year I'm, just trying to think like how should we view that is that just because.
It is resulted in less vehicles big ensure that the industry level or is that you've kind of pulled back on your marketing efforts in order to gain.
Market share because of the covert disruption just wondering how you're thinking about that.
Yeah, I think Paul.
Just go out of memory here and you look at the policies in force in in personal automobile in Q1 2019, when we were deep into the correction our policies enforced dropped 4.6%.
It takes you let's take this six months later as the market started to change.
Policies in force.
Then.
Shrank by two but half the rate at which they were shrinking coming in to 19.
Starting 2020.
Policies in force were up 2.2%.
And in Q2, 2.6% this year. So for me I see the trajectory that I'm looking for in terms of our portfolio.
They are written risk are indeed.
You know still flat, but quite different from where they were 12 months ago, where we were shrinking the business by 5% I think that the industry was meaningfully behind us.
On the rate point of view.
And and as such there's a time lag here, but that trajectory.
Is there you know we remain we remain cautious in automobile insurance, we have been true what I would describe as three years.
Serious Spain.
And and we don't want to be back in that zone, we want to firmly operate the business in the mid nineties.
Worse, and we're taking all actions, we can but I like the trajectory that we're seeing.
Great I hear you on that.
Good question as related to a investment mix.
Your net exposure to equities have come down since the start of the year and obviously, there's some market.
Mark to market factors behind that.
Wondering in any way has your long term thinking towards.
Asset mix changed at all.
Let me ask do we too.
Take a shot on your question and then ill conclude.
We.
Thanks, Charles Paul we have a as you saw as you noted diminished.
The the asset mix in terms of the equities for shirt, largely driven by the impact of the markets, we have chosen not to.
Go back to our.
Previous asset mix on purpose I think we are a bit cautious here on de risk taking on the equity front and we took some actions in Q1 that panned out well with the strong balance sheet same physician in Q2, and I think we're we're being.
Cautious here before rebalancing our mixed what it was in the past now my sense is the long term view has not changed at some point, we will migrate back towards that mix, but in the short term and theres a bit of a preference to.
For caution.
Yes, Paul I would say that first point I'd make is the team under burner Molin on and Dave Todd Lean Montreal have done an outstanding job navigating the environment.
We don't.
In the market.
We have a long term total after tax return strategy, which is.
Optimized against our portfolio, but the guideline I gave these guys.
Late February.
Is.
We want to play offense and defense in this environment. So not only do we need to absorb severe shot but in relative terms, we want as an organization to be in a position.
We use our balance sheet to grow the business and I think when you TRO this sort of strategic direction.
In in the mix that's why we've we are in a position now.
Probably one of the most conservative position compared to that policy for a long period of time and it's within objective of being able to play defense and office.
Great. Thank you for your time.
Our pleasure.
Our next question comes from Jamie Glenn from National Bank Financial. Please go ahead.
Good morning, Jamie.
Good morning.
I was actually hoping you could talk about the U.S. business and and some of the developments that are going on there in terms of pricing around certain products and performance of certain products are you are you looking to tweak up or down any of the the lines that your end.
Or potentially looking at some new lines, given what's going on the marketing use.
Yeah I mean.
In fact your question is very timely Jamie I met every one of our 12 business units individually in the past two weeks just to gauge the state of the market.
Our teams are doing in this environment and the competitors, we need to watch and all see.
I'm thrilled with.
With how things are going the lines of business as you know I would put them in two buckets I would say you've got.
The lines of business that are doing very well and you've got the lines of business sworn segments that have been tough we call that our profitability improvement lines I.
I mean.
The bulk of the business.
That is not in profitability improvement.
At the moment is running.
In the eighties.
And these lines of business.
Our growing at about 16%.
In the quarter.
The line to the lines of business, where we're doing correction.
What are heavily on the liability front, we've seen tremendous improvement compared to last year in those segments. They are not yet at the level of profitability. We're looking forward to grow those and that's why when I look at these lines where from a growth.
Point of view shrinking dose by 20%, so Jamie I'll see high level. This strategy, we put on the table in 2017.
Grow the best performing lines and work on the lines that we believe in but that are not yet at the right stages very much still what is.
What's happening now conditions are firm.
Or hard in the U.S. and I'd say, we're open for business, we're seeing good progress.
Across all the lines that are that are profitable.
As I said I mean, these lines are growing at 16%.
At the moment, we had a very good footprint, we're keen to build on that footprint. We're also I think making progress on expanding within those lines our distribution footprint.
And I'm, you know I'm quite pleased with what I'm seeing sort of the border at this stage.
Thank you.
You're welcome.
Our next question comes from Michael Phillips from Morgan Stanley. Please go ahead.
Thanks, Good morning, everybody Charles and your comments, you talked about the digital and AI emphasis and I guess couple of questions around that.
One is where where it is what what parts of your business are you talking about there that you'll be more digitally focus.
And then secondly.
You said double down on the digital edge.
Does that does that mean any kind of near term investments and maybe a little bit of headwind on expenses that we should expect.
Yeah. So.
You've captured my words very well so.
Anyway.
75% of our efforts, which has not slowed down one bit.
Our directed to predictive analytics.
True machine learning in pricing and segmentation.
Digital more broadly.
Is in all our channel sorry, our thought process. There is to make sure that the digital digital value proposition compares with the best insurers in the world and that's.
Very much the tools we have.
And.
And then that we use digital and claims meaningfully and saw a less that's I think in claims for instance, so it's very much customer experience driven.
Yes, I think to give you a sense of the progress we've made in claims.
In the last three months.
On the digital front.
Yes.
So we had started to develop quite a few tools in claims even in the last year or so I would say some of the tools where there what.
What.
This situation.
Of course, David that allows US is we've seen that very sharp increase in that take up rates. So what this does it help us learn much faster and improve those solutions much faster than in a slower.
You know progression of penetration in terms of more specifically the tools, where we've been using you know we.
There are possibilities for our clients to five that claim on lines track. The progress there's a lot of automated notifications that allow clients to keep track of without the next steps in their claim.
Cetera, but given the.
You know the pandemic, we've also leverage videos and the pictures.
Thats aren't taken from clients to be able to do a lot a big portion of the assessment of the losses from distance and.
We've seen that desk as started to accelerate in many cases, the cycle time and the quality of service. So to give you a perspective today or over Q2, it's more than 60% of all the auto claims that we were able to estimate completely the damage from remote based on.
Pictures taken from clients and that number was in the teens.
Entering the prices so a big progression that allows us to then accelerate also the next steps.
To offer to clients more straight through processing and accelerate the debt.
Process from a residential perspective, another example, because with that on side.
We confirm coverage based on videos that are taken by clients and on site staff from remotes and instead of taking up to three days and average to be able to confirm to declines the coverage, we need to do that within three to four.
Business hours.
Just a few examples of that love that sort of.
So massive jumps in Q treat now the last part of your question Mike was.
Accelerating investment an expense drag in all last week who's done a really good job what his team.
Two basic he looked at the and then Nick assess.
The.
Additional costs that came from the pandemic.
And figure out two things, how we could absorb those costs to make sure our performance remain on track and how we can take advantage on an excess supply in the system to accelerate.
Some of our investments in technology without creating a drag to keep expenses on track soon we why don't you talk about the exercise we've done in March.
On that.
So that Mike understand that will not be a drag here.
Sure. Thanks, Charles So a in March we assessment as a crisis started we undertook a process to identify what kind of headwinds we would face in terms of cost and potentially the savings we wouldn't harvest from the crisis as well and it became fairly clear that in fact, the savings would basically offset the cost.
So we could managed through the crisis without a drag at that point. We also took on a project to actually.
I think people that were perhaps underused in some sectors. We saw clearly that phone calls were not coming in the same volumes as usual, it's about a thousand people that we actually redeployed in multiple areas and that business, where we saw more needs and you won't be surprised that portion of those people will have been re affected two they are a function for example.
For collections, but we took a number of people as well to support the digital engagement.
Assesses and we took a further.
If people to accelerate our digital initiatives and our.
Developments and so the view here was take advantage of the resources that are suddenly a bit less occupied redeploy them and the right areas and accelerate some of the developments. We were already working on we went further than that tried to harvest a further savings.
On the from the pandemic throughout the year and those savings essentially are being reinvested in acceleration of our technology investments.
So weve shifted some of that money from the savings into the investment.
Investment pool, if you want and a with a view that overall it would not have a significant impact on the expense ratio it might not be totally true on a quarterly basis, but our overall view for the year. In fact is that we come out.
Neutral on expenses.
Even after taking into account the bad debt. So that's that's how we undertook this and as you as you are the very limited drag on expense ratio with accelerated development of technology.
Okay. Thank you guys very much appreciate all the details.
No problem.
Our next question comes from Mario Mendonca from TD Securities.
Please go ahead.
Good morning, Charles and Lowi, both of you in Q1 caution that results could be lumpy on a quarter.
Quarterly basis throughout 2020.
Would you say this quarter was lumpy to the positive.
And if so what were some of the reasons why that played out.
Yeah, we do want to you want to take a crack at this.
Sure. So I so the Lumpiness I think here comes from the mismatch between when the release measures are given and when they actually get earned and then going against that would be the protect the frequency for example impact and elements like that.
Thats so as much as you know most of the impact from the activity reduction with seem to be happening in Q2.
We knew that the release measures, we were putting in then because or risk base or that at the customers. They weren't all going to roll that out in the same quarter as the benefit would come out and so we knew we see different.
Results per quarter, and we're trying to give as much clarity as we can in terms of how they will impact future quarters, but dealing with a lot of uncertainty where it would land.
We feel comfortable saying, it's going to be on track overall, but quarterly it might evolve a bit differently and that's why we took that stance.
I think I think it would be fair to say that we're it was positive in Q2 and and then for the rest of the year, we're suggesting on track.
It could evolve Q2 Q3 between Q3 in Q4, nothing necessarily even but come back to be on track for the for the rest of the year yes.
I would say Mario I don't expect a negative lumpiness to the bottom line for the rest of the year I think Q2 was see team.
Strong quarter with very strong fundamentals across the business.
I think personal auto my time, you know a mild positive there, but then commercial lines.
95% in Canada in my mind.
Was see a negative.
And so in aggregate I think this was a very good very strong very clean quarter, and we'll try to keep the bottom line on track for the rest of the year I think from it topline point of view.
This is where you'll see more lumpiness.
There you and when we said mid single to low teens wit.
Variations by quarter in line of business, we're putting the spotlight this quarter on the fact that personal auto topline next quarter will be impacted by.
Roughly 10 points of I've written relief measure.
We're confident though that the bottom line throughout the year will remain on track sort of inline with what one would otherwise expect our performance to be.
For the rest of the year.
I don't want to put to find a point on it but if you're saying that that's true for full year 2020, and the first half was I think better than what you might have expected because of the well phenomena that played out doesn't necessarily mean, the second half has to be.
Actually have to show some negative lumpiness, if you will.
Yes, I don't really see that.
Mario I think that.
You know, we're using words like on track and the range, we're providing from a topline point of view admittedly is wide.
But you'll like me admit that we are in a bifurcated environment.
When we model a good a bad and Augie scenario, we think that we've got the lever to make sure that the underwriting performance remains within a fairly.
Narrow range, you and I had talked about that an hour fireside chat in early April My view is still the same the first part of the year benefited a bit from weather admittedly in Q1 was one of these.
These elements.
And whether is one time and making the average between the first staff and the second out here is not how I would look at this and so when we see on track for the remaining of the year, that's pretty much what we mean.
Okay, well one of my second and final question relates to.
Charles you referred to $30 million in response to Jeff's question I was one of the first questions on the call.
I thought you were referring then to coal that 19 related claims but in the and then yes I thought you said there were no Goldman 19 related claims maybe I just misunderstood.
Yes, I think.
One of us I misunderstood, but the 83 million dollar Q1 provision that we have put up.
Would be direct.
Hi, good 19 related.
Provision gay so you look at all your portfolio and you see what claims can arise because of pulled at 19 and so we came up with 80 tree in the quarter.
Our ultimate view of the direct coal that 19 losses is still $83 million.
The point.
I mean, and I gave a ballpark 30 million Bucks is the case incurred that is the actual claims we've received.
83 was a bottom up.
Assessment of what could happen.
Andy 30 ish million is actually what has happened so far.
And obviously, it's early in the process so.
Maybe somebody can add.
Yeah.
John I agree with you I think maybe to further illustrate Mario the.
When we started at the end of Q1. This analysis all of his was in reserves now as the claims come in and we sell them you see we reduced the reserve because we pay those claims so that 30 minute million is the actual in cured, but the some of the ultimate capacity that 83, so there's no impact in Q2.
I see so you haven't actually paid the 30 Thats just what's been encouraged so far.
What a good portion of it this space so thats pay than case reserves booked five by file reserves and then the total reserves, including what's expected that could be report later.
The same 83 so.
During the quarter there was no no impact what just to give us feel of the actual activity, we see and the claims.
Sorry, My confusion is that you paid some of those reserves why wouldnt sorry, you paid some of those cobot claims why wouldn't you have released the reserve.
Well, we did I think.
I think marriotts you'd think about it you break it into three buckets here.
Got you have.
Paid losses that are closed or partial payments that you make.
Then you add the actual fire claims that came in for which we've set up a case reserves.
Let's see the ballpark some of those two things is 30 million Bucks. The rest is I'd be an art, it's what we might receive in time for.
For claims that have been incurred but not reported to us just yet.
The ultimate is 83 now when you get a clean.
You know you I've set up a case reserve, which upsets your payment.
But overall the ultimate is very much still in the ballpark that that we have put out there.
Okay. Thank you.
Our next question comes from Tom Mackinnon from BMO capital. Please go ahead.
Yes, thanks very much.
You continue to sell that fall the impact of called the 19 terms will be club you.
Oh growth is going to be more mid single digit below digital low double digit rooms for 2020.
I mean, that's consistent with the guidance you provided first quarters, while I'm pretty well consistent with what you've said blom whats going back to early April.
My question, though is on page five any M&A, particularly with respect to personal lines, where we look at the impact of premium reduction in terms of what was written.
In the second quarter year to date in second quarter and then there's another conversation today provided.
With that.
Paul.
Yes.
On a one number.
What provided for personal lines 100 more will.
I thought.
Measurements as well.
We're putting in place for which you will not.
Well were people Paul will say, you know I'm not driving as much like.
Thanks.
For three months or my.
My car.
For a long time, when I get a 75% when I thought a lot of the overall the longer on June thirtyth.
So I.
Wouldn't look much different too.
And what's been written.
Year to date in terms of the 90.
And then what will come and go provided in terms of Paul.
One more.
Tony.
The difference there are you, giving some other.
Tempering rate increases at renewal for various personal auto policies is that why there was that difference maybe you can help us understand that yes, theres a couple of things. So first then mechanics of the program, which by the way we've increased to July Thirtyth. So if you haven't called US Don you still that's one.
I do it so.
So we gave we gave we came out early with this slide before any other relief measures were announced in the industry. We were out with the risk phase needs based program.
Basically said look call us until June or now July.
We'll give you bring forth portree months.
And that great turned out to be an average discount.
22 ish percent now we've given those.
All right up to.
Tomorrow.
And of course, when you give that you've got three months forward.
Of this impact right. So that's why the written on these measures.
Will impact other quarters as well and then on top of that.
Weve mitigated.
Rate increases in the system as well.
To make sure that.
There were no extreme dislocations or not to large dislocations in a period like this one is that Ben.
This is your domain. So I'll, let let's you add to what I had said.
And then maybe correct what I've said it feels that there is something that was helpful. Mark.
Yes, Thanks, Charlotte No I think it's still study right then and.
Right Tom in your assessment that.
With that tempering of rate increases since were issuing probably season that van so some of those that's why do you see that's been each year to date, but will in fact that top line on the in Q2. So that's why there's a difference between that total hued relief in premium relief.
Versus the ones that are impacting Q2.
Okay, and then I'll take a stab at trying to.
Help quantify what you mean by underwriting performance being on track would you say that it's on track in terms of what you expected for a dollar amount of underwriting profit or is it on trough in terms of what you wouldn't expect as a combined ratio.
Yes, I think that.
We're talking about.
The underwriting performance as measured.
By underwriting profit.
Basically which is not too far.
Tom which is not too far from from combined ratio quite frankly, but that's the way to think about it and so you know what.
So.
I think when you look at it by line of business.
Before the crisis.
You had a good sense of what we wanted to achieve.
Hi level by line of business and really that's what we mean when we see on track you know are seeing automobiles should should should operate in the mid Ninetys, we're seeing commercial lines should being the low ninetys, we're saying first of all prop shouldnt be sub 95, even in that.
At times and as you know personal prop weather is.
It's a big component.
The number so it's hard to.
You know a number we're seeing here sub 95, even in good times and the U.S. low ninetys. So that is what on track looks like from a combined ratio point of view as far as we're concerned but our perspective is the.
Operating in the underwriting performance really.
Should be on track.
An underwriting profit terms.
Okay. Thanks for that.
Right.
Our next question comes from Steve Aerleo from East Capital. Please go ahead.
Thanks very much.
Just a follow up a little bit on Toms question, I guess, how deferrals leg into earned premium when we consider the the recovery in miles driven and Isabel gave some color on that.
Do you expect that to translate into premium reductions dropping significantly in Q3 and others. The two pieces, there's the reductions in the payment flexibility, but maybe a little bit color there would be helpful.
Is that as you want to provide a bit of color on Q3.
Yes, sure. So as we just discussed in the previous question.
Alright, the topline impact of duties will happen in Q3.
So also on the earning perspective, those relief and they will follow progressive dividend over time.
So the difference between what Theyve been provide third will be I mean over the coming quarter, while this still.
I mean driving activity that would be returning to normal so we need to keep in mind that those two effects without fab, but we're not be perfect easy made threeq over time.
But dart program was built and I think that's in mind, so from an underlying underwriting standpoint since the crisis. I start then we aren't heavy I expect that there are a relief and driving activity will that affect each other but we know that.
They may be some timing difference between quarters.
Yeah, I think that the relief measures clearly.
Were based on our expectation.
What we would see in the next.
Three to six months.
And also based on our expectations that returned to normal would be gradual overtime and that part was more reflected in the rate tempering that we've put in place and so on.
Okay, and then just secondly, I wanted to follow up on one of the comments on on digital and that was an interesting example in terms of 60% of auto claims being accretes digitally.
So how permit can you talk a bit about how permanent a shift you would either expect to see or really want to see there and how comfortable and how should we think about any risk of of misuse.
I think that.
The changes we're seeing on the digit digital front.
And the stepped up that we've seen in Q1 in our mind will be a new plateau.
Grow from we're not going backwards from there and our value prop from a digital point of view.
Will will improve over time, because as I've mentioned weve doubled down on our investment.
There.
In terms of misuse per se.
I'll let.
Patrick maybe share his perspective, given how much activity has taken place.
In claims and I think misuse you know if I get you properly more likely to be an issue in claims than.
Then in sales or a underwriting which was to start with data driven.
Very much short so so Patrick why don't you comment.
On.
On that and some of the work being done with data from the fraud management as well.
That's a that's right so.
[noise] by misuse and claims of course you.
When you start doing estimates from picture is perceived they're taken insulin control of the clients who want to make sure that you don't Miss.
And the a information compared to when you actually send someone looking at the car as an example, so I think this this was from the start.
One of the key questions for US go moving into the digital weight of estimating damage.
So we add prepared.
Quite a few controls around that's we have to.
I understand that that the end of the D. as well there is a a relying that's work that's actually make the repairs and that cannot just at this time that with US and we also have a pretty robust odd that process.
Based on on data in fact, the on the eye and of that people looking at a simple of those things and so far.
I would see that the signs are very positive in fact, we've seen.
And the additional precision up to now on the exact on on the assessments that are done with this week, partly because the the process is consistent with our clients when the send us the information about the claim their guy that through our mobile app of what type of pictures. They have they are Smith.
The behind those pictures that allow us to confirm.
Time stamps and locations and all sorts of things that is very useful and.
Investigations. The claims so I think we have quite a few angles that control how are we.
He abuse that could arise from.
Digital process.
Okay. Thanks my color.
Our next question comes from Doug Jones from dish or Dan capital markets. Please go ahead.
Good afternoon, just maybe I'll start and hopefully these are fairly quick but can you quantify how much of the year over year improvement in the personal auto loss ratio related to past actions, which you clearly done a lot to fix the business versus what you can kind of bucket within the Kogut Empire.
Correct.
I would just wondering if you can quantify that.
No.
That's you know I think you'll back to Q1 and looked at.
What I happen to the fundamental to get a sense of proportion.
Because there was really no.
Covidien in any meaningful way.
In the first quarter, otherwise, it's very hard.
To break down the impact of mix versus the impact of reduce driving net of relief net of.
Severity, it's a it's something that we don't want to come out and speculate about because.
You know, there's a lot of judgment to separate.
Claim that you don't get.
From a course as opposed to another clean you don't get from another source. So.
Okay. So if we looked at Q1 assume maybe a little bit incremental more benefit that would give us at least the.
A rough guess ballpark does that what you're suggesting yeah, well I guess, what I'm, suggesting is Q1 showed a lot of momentum.
In terms of.
Frequency and severity and I think that it's fair to assume that this carries on.
In Q2, you know.
Hi Inn earthquake, but it's certainly a good sense of.
What that momentum was.
Sure. If I May then show that from a claims perspective.
Especially comparing Q1 versus Q2, it's important to factor in seasonality, especially on the line Q2 is historically the best quarter.
Yeah Okay.
I think thats critical point that I think you're right and personal automobile this is where the delta.
Is is the most meaningful from a seasonal point of view.
Okay, and then just second.
The probably your reserve developments were little bit lower this quarter, China, because 0.1% of opening reserves, you've guided to 1% to 2%, but I think you've also indicated that it's going to run lower.
Specifically around person a lot or was there anything unusual in the quarter. I mean this was just generally just an unusual quarter I think it's going to be for most companies, but just wondering if there's anything else.
In there that we should be thinking about from a few why are the perspective. Thanks.
Yes, I think theres nothing.
Prospective slash permanent end. This we have a range of one to tree, we said that in auto we would try to run this has close to the line as possible and given the uncertainty.
In that line of business and.
Maybe we do you want to comment on on the T y here.
Well I think we said.
One to three and Thats why lines of business, we were guiding to as you say close to the Mark in the U.S. as well and then on the other lines of business a bit of activity, but I would concur with you Charles there's nothing.
A structural or permanent here I think it's one quarter and.
We're still confident in our long term.
Long term guidance.
Thank you.
Yen and and.
No.
I wouldn't qualify this.
Yes necessarily at a normal quarter I think.
Weve tried to front load the impact of coal that 19 as much as possible in Q1.
And I think.
The quarter showed good bit of momentum.
Plus here a bit of minus there, but overall.
Very good team quarter.
Thank you.
All right.
This concludes the Ken a portion of our call.
Back to Ken for concluding remarks.
Yes, 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 also be available on our website in the financial reports and filings archive and finally, our third quarter Twentytwenty results are scheduled to be released after market close on Tuesday November Threerd.
Thank you again and this concludes our call for today.
Thank you ladies and gentlemen, this does.
Indeed conclude today's conference call. Thank you once more for participating you may now disconnect.
We still done.
Yes can we use the webex now.
Yep.
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