Q3 2020 Intact Financial Corp Earnings Call
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I would now like to hand, the conference over to one of your speakers for today, Ken Anderson Senior Vice President Investor Relations and corporate development.
Go ahead Mr. Anderson.
Thank you Carol good morning, everyone. Thank you for joining the call today.
Like for like what Thompson published information for this call is posted on our website in time that the dot com under the investors tab.
As 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 harassment on semesters unimportant, though.
On adjustments terms and definitions used in this presentation are.
Our executives are joining today from across the country in Toronto, we have our CEO Charles from the more in Montreal, our CFO.
CFO Isabel Gerardo SVP of personal lines and profit Fargo SPP, a plane and joining from Calgary, Darren Gottfried SVP of commercial lines will begin with prepared remarks, followed by the Q and a with that I'll turn the call to our CEO Charles. Furthermore.
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Well good morning, everyone and thank you very much for joining us.
Today.
The pace of the cold at 19, and then Nick has accelerated in the last few months across North America.
And it continues to cause significant pain and hardship on society.
We're thankful for the dedication of health care professionals and frontline workers throughout this year.
Businesses are an increasingly important role to play in protecting and supporting their communities through this crisis, especially the second wave.
It's more dramatic.
We entered the crisis in a position of strength.
Which has enabled us to support our customers while protecting employees.
To date, we've provided 510 million of relief to over 1.2 million policyholders.
In response to the changing environment, our relief measures are evolving towards rates.
Right strategies based on our customers' changing risk profile and needs.
Accelerated deployment about where you'd be only offering to deliver savings to customers for safe driving habits, and they'll work kilometers driven.
No the two product announcements and personal property to support work from home.
And continued support for the most vulnerable small businesses to our ongoing policy in a rate adjustment as well as they recently announced a 50 million dollar relief program support approximately 100000 customers in the small business area.
It is our strong performance over the years that has enabled us to provide substantial relief to our customers.
Now, let's turn to results.
Yesterday evening, we announced.
Third quarter net operating income of $2 78 per share an increase of 46% over Q3 2019.
This led to an operating are we up 17%.
Our resilient operations, along with the Tailwinds from our action plans over the years and benign weather.
Then it burn a strong results.
[noise] topline growth was a healthy 8% in the quarter with China, they're growing at 9% and the U.S. at 3%.
The overall combined ratio was strong at 87.1%.
Solid underwriting performance across personal lines and commercial lines.
There were no direct COVID-19 provisions recorded in the quarter as we again I've seen no evidence to warrant the change.
Our initial Q1 provision.
In Canada. The combined ratio of 86 was strong driven by underlying performance.
And then the lower level of cats.
The U.S. commercial lines delivered a solid seasonal 94.5%.
Let's now look at our results by line of business, starting with Canada.
In personal auto growth was strong at 8%, that's all relief measures and improves our competitive positioning leading to high retention and robust new business.
The combined ratio was solid at 84.9% with the underlying loss ratio improving nine points.
The underlying improvement is driven by our profitability actions.
Changing mix benign weather and reduced driving activity.
Driving activity itself has increased since last quarter in a stabilized slightly below threeq.
Pre crisis levels.
Overall, the fundamentals in personal auto are solid and I expect this business to operate in the low end of the mid Ninetys range next year.
Looking at the industry right momentum has been impacted by the crisis.
However, with an industry combined ratio over 100% at you too.
We expect corrective measures to resume as claims frequency returns to historical level.
Later.
In personal property premiums grew a strong 10% driven by market conditions.
Unit growth and the GCN acquisition.
The combined ratio of 83.7% was driven by our profitability actions overtime and benign weather conditions.
Over the last decade, we've more than doubled the size of this business.
Well better protecting Canadians from the risk of climate change.
At the same time, we've transformed our offering advanced our pricing and risk selection and move deeper into the supply chain.
Personal property performance is in the right zone and I'm considered.
This will continue.
In commercial lines.
Premium grew 11%, reflecting the GCN acquisition.
Growth has decelerated as this segment is exposed to the economic slowdown.
I know that smbs in certain sectors are severely impacted by the crisis and economic slowdown.
We are here to support our small business customers through this difficult time, and our relief measures are ongoing and evolving.
The 89.4% combined ratio in commercial lines reflected strong underlying performance and a lower level of catastrophes.
I expect this business to operate in the low Ninetys next year.
Well the hard market industry conditions in commercial PNC of returns we continue to temper our rate increases for the most vulnerable small business customers.
In commercial auto the hard market conditions remain tempered by the crisis.
Moving to our us commercial segment.
Premiums grew 3% with.
The GCN acquisition, adding five points.
Lower volumes than lines impacted by the crisis, such as ride sharing and entertainment upset.
I've said the strong organic growth in other lines.
The underlying loss ratio improved pointed points driven by our ongoing profitability actions.
The combined ratio was 94.5%, including three points of seasonality.
Solve it.
This segment is positioned to hit our sustainable low ninetys objective.
The U.S. commercial market is hardening and we expect that to continue.
On the strategic front, our teams haven't missed a beat advancing our long term roadmap.
Expanding our leadership position in Canada Us front and center, we've made significant progress first our customer experience is second to none.
We reached a significant milestone in better direct with three out of four customers digitally engaged with us.
Our mobile apps continue to lead across Canada, with the better direct and in fact insurance, taking the two top spots.
In the App store in the insurance category.
And as economies have reopened our digital engagement across our claims absent new B. I have all remain at record levels.
Second broker link recently surpassed 2 billion a premium says it continues to grow organically and through acquisitions.
The growth story isn't done as we've said in new premium target of 3 billion for broker like.
And finally, the integration of GTN is progressing really well we're on pace to meet our financial objectives on this transaction.
Building, a leading specialty lines players another one of our main strategic pillars.
And our execution is continuing.
In September we acquired international Bond and Marine a leader in the U.S. customs bond market is stuck in was in line with our strategy of finding unfortunate piece, where we can leverage our manufacturing capacity gain deep expertise in specialty markets and capture an honor.
Going growing stream of distribution earnings.
In October we brought together, our Canadian and us specialty platforms under a single brand impact insurance specialty solutions.
This is an important step as we build a world class specialty platform.
There is significant growth potential in this business through organic and inorganic fortunate fees as we drive towards our objective of 6 billion of premiums running in the low ninetys.
Finally, we've reinforced our commitment to be a best employer and support our employees through this difficult time.
Weve ramped up training and awareness around mental health issues, and then started diversity and inclusion strategy and invested more in learning and development. These initiatives that help drive an all time high employee engagement across our organization as measured in September.
As well for 2020 were recognized again as a best employer in both Canada and the U.S.
Our outperformance mindset is what sets us apart from our competitors drives us to deliver our promise to customers support our communities, we transform our competitive advantages and to build a world class insurer.
In conclusion, we have made significant progress on our strategy, while delivering strong results. We ended the quarter with the robust capital margin ready to manage potential shocks and invest in strategic opportunities that will come our.
Our book value is up 10% year over year, and we're delivering a mid teens operating are we.
Our employees have made this outperformance possible that I want to thank them for their continued focus and hard work weve.
We have the best team our business is very resilient.
And we're very well positioned to surpass our financial objectives in the years ahead with that I'll turn the call over to our CFO will not cut.
Thanks, Charles and good morning, everyone.
The crisis continues to have an impact on society, and we remain committed to supporting our customers brokers and employees throughout these uncertain times.
This in mind, we recently launched a $50 million targeted relief program for our small business customers, bringing our total relief to $510 million and covering over 1.2 million customers. These.
These new targeted measures will be entirely written and earned in Q4 2020.
In Canada commercial lines.
During the third quarter the relief measures impacted our written premiums by five points and our net earned premiums by one point.
The earn portion of the relief measures will impact net earned premiums in future quarters offsetting the impact of reduced frequency.
At the end of Q3 incurred losses related to covered were less than $40 million with more than 85% of reported claims already paid and closed.
We are therefore confident that our provision for both corporate related direct losses and.
Bad debt remain adequate.
Moving to results.
We delivered strong net operating results of $411 million up close to 50% versus last year, driven by strong underwriting and distribution performances.
Underwriting income grew 86% over last year, driven by our profitability actions and benign weather combined with higher earned premiums.
This was partially offset by our continued relief measures.
Net investment income of a 143 million was down 2% compared to last year.
This was mainly due to lower reinvestment yields partially offset by higher invested assets from did you see any acquisition.
All else being equal we expect net investment income for Q4 to be similar to Q3, reflecting lower yields.
Distribution EBITDA in other income grew 45% in the quarter, driven by underwriting profitability organic and inorganic growth, including the additions of FCC and on side as well as disciplined expense management.
On a year to date basis distribution income grew 24% above our earlier expectations.
When including Q4 earnings we expect full year growth to be around 20%.
Now let me provide some additional detail on the underwriting results beginning with Canada.
Our action plans and our improved competitive positioning and auto led to solid results as units grew six points in the quarter and profitability was at 84.9.
The improvement was driven by a combination of better weather conditions, our profitability actions lower driving activity offset by release measures.
With regards to our decision to exit the BC auto markets. This will have a negligible impact on our underwriting performance.
And personal property organic growth was largely fueled by unit growth and the high retention ratio.
The combined ratio improved five points, mainly driven by our profitability action and.
And mild weather Conversely, the expense ratio increased 2.1 points driven by higher variable commissions due to strong underwriting performance.
Our Canadian commercial lines, we saw premium growth of 11% in Q3, mostly driven by did you see any.
The combined ratio of 89.4% reflected a solid improvement of 2.4 points in the underlying performance, mainly driven by lower claims frequency and our profitability actions.
The Canadian expense ratio of 29.8% for the quarter increased two points from last year. This was mainly driven by higher variable commissions due to continued improvements in our underwriting performance. We expect the full year expense ratio to be in line with our year to date figures.
Turning to U.S. commercial.
Keep in mind when looking at our Q3 results in the U.S. that there are three or four points of unfavorable seasonality.
Having said that the underlying loss ratio of 57.3% in the quarter improved 0.8 points, which was largely driven by our profitability actions, including migrating to a more profitable business mix.
Despite the high level of cat activity, we've seen across the U.S. landscape. None of these events generated losses that met our own cat threshold.
It has however impacted non cat losses in the quarter.
The U.S. expense ratio of 39.2% was 0.8 points higher than last year, mainly due to the addition of juice and these surety business. We expect the full year expense ratio in the west to be slightly lower than our year to date figures.
Our operating performance led to an operating are we are close to 17%.
In terms of our outperformance Weve generated 690 bips during the first half of 2020, well above our objective of 500 Bips now looking at our balance sheet. We ended the quarter with a strong financial position with a total capital margin of 1.9 billion and debt to total capital ratio of 21.2%.
We remain on track to reach our 20% target over the next six to 12 months. We also have $500 million of cash at the holding company and our 750 million credit facility is entirely undrawn.
Our book value per share increased 4% since June Thirtyth to 50, 622, thanks to solid earnings and favorable capital markets before.
Before concluding I'd like to draw your attention to the risk of an impairment loss of 96 million pre tax in Q4 related to the equities that have not yet rebounded from the pre crisis levels.
This may change due to market fluctuations, but as a reminder, the impairment will not impact our capital position, nor our book value per share.
Overall, we have maintained a position of strength throughout this crisis and that has allowed us to continue to support over a million customers coast to coast. We are well positioned right now both from a profitability and a balance sheet perspective, while the fundamentals of our business remains solid on both sides of the border we stand ready to deploy capital as opportunities arise during these uncertain times.
Sweat further value for our shareholders with that I will turn the call back to Ken.
Thank you Lily in order to give everyone a chance to participate in the culinary we would kindly ask you to limit yourselves to two questions per person at this time at the end you can certainly re queue for follow ups. So Carl we're now ready to take questions.
Thank you.
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Our first question comes from James Klein from National Bank Financial. Please go ahead.
Yeah, Thanks, and good morning.
Good morning, James.
[laughter].
I just want to.
Dig into the M&A picture first off and can you just reiterate what you're what you're seeing in terms of opportunity.
Opportunities nice tuck in with that with IB nm.
Looking at the excess capital of three to 500 million and then the credit line facility as well here in Spain.
So.
Our <unk> how is that part of the picture evolving.
Well. Thanks for your question James Yeah, the acquisition in the US that you just pointed to.
Hi, BNN is very consistent with the strategy, we've laid out to build a distribution footprint in the us to really help scale up some of our operations in this case, our surety operation expand our reach and at the same time build our distribution earnings stay.
Cream, which as you've seen is a very healthy.
And growing now your question is bigger than that James I recognize and you know our thesis is very much intact, 15% to 20 points of market share here in Canada will change hands in the coming years, we think that with an industry.
Running in the single digits are we range with the dislocation that is taking place.
Globally and the pressure that Covance is.
It's putting on institutions here and abroad, we think that.
This is a good environment than the coming months coming years for.
For consolidation to take place that's the first point and as you know.
Spending.
Our position in Canada is our number one priority when it comes to capital deployment.
Second point I would make James says that.
There's a fair bit of activity at the distribution level in Canada as well.
The.
Joint venture, we have with the number of brokers and then broker linked also very healthy healthy.
Deal pipeline.
Pipeline and were really bulking up.
And helping a number of players including broker linked to to consolidate the space and again you can see the distribution income earning stream here.
Being a reflection of that activity.
Clearly if you move south of the border when you look at the performance of of our US platform now known as intact insurance specialty solutions you see that this is really operating.
In the zone that we were looking for before the planned capital that is low ninetys.
And if you take season into account, that's very much where the business operates now.
So we would look to deploy capital in that space, but we need to find a target that books up the strategy that we're focused on.
In the U.S., but I see an unfortunate to consolidate.
A portion of that market.
As well, so I would say in aggregate I.
I think we are in a very healthy environment to advance our consolidation and acquisition strategy and.
We think that.
The oral fortunate these to leverage our skills at integrating and creating outperformance on a bigger base.
Thank you for that and a second question just digging.
Digging into the into the U.S. operations organic growth was down 3% or 2% I guess.
Year over year in this quarter.
Primarily on the ride share and entertainment businesses can you can you talk about the organic growth outlook for.
For the other lines or even those lines as well as we head into Q4, and then into 2021, what you're seeing in terms of.
Unit growth and that and rate growth in the in the U.S.
Yeah. So I think you know high level the market in the US is heart broadly speaking and when I look at our own business.
And you know I leave aside.
The noise that.
Colin as related in terms of business activity.
See it as an upper single digit.
Growth story quite frankly.
We've seen throughout the year.
James that.
Most of the lines of business that are not under profitability improvement plan are growing in the teens.
The lines of business that are under profitability improvement plan have been shrinking I see that worked.
Wart.
Diminishing next year, because there's been so much heavy lifting that's been done by our teams that are trying to improve performance that all in we view 2021 for the us business as upper single digit sort of performance.
A combination of rate stepping into the hard market you know.
And then some unit growth as well.
Very healthy organic growth profile, there I don't know I see a direct is nodding in Calgary, Darren do you want to add a bit of color.
No I think the only thing I would add that shall is you're right in terms of Q3, obviously.
Some of the quarter the sort of economic sectors. You can think of sharing economy and you can think about payment for example, where we saw some top line pressure as expected.
If we somewhat.
Look at the other lines of business.
We're in the upper single close to double digit range gross.
In the U.S. on those other lines of business, So again and very consistent with what we would expect moving forward into 21 as well.
Thank you.
Yes.
Our next question comes from Michael Phillips from Morgan Stanley. Please go ahead.
Hey, Thanks, good morning, everybody.
I guess first question is on a lot of talk on digital and in personal auto on on UBI I guess, how much of that do you think the uptick is more temporary because the times revenue for us.
It is a longer term trend that you think should sustain once we get out of the cobot crisis.
Well.
I don't think its temporary I think that it is.
It is a trend clearly the spin the agent drink cold bid, but Michael we've been very proactive for the past four years to build a massive.
Telematics or UBI I program, and we're clearly in the current context, where it makes eminent sense for people to embrace that technology have been pushing this as a product that is really good for customers. The reason why I don't see this coming.
Now on is.
It's because of the fact that.
The the telematics offer is actually evolving a fair bit and what you will see it in fact and better directed early 2021 is a broad range of value added services that.
That will be provided as part of our telematics offerings, which will not just be about how well and how much you drive and what it means for your price it'll be about your driving experience and what intact or better direct can do for you and we will clearly tap on these new features as we enter.
Turing to 2021 to make sure that the trend goes up you will also see.
That they marketing game plan will very much back up this notion we have a big lead in telematics and we want to make sure that we accelerate that lead.
Going into 2021, and as I said, it isn't touch with times and what people are going through in terms of changing habits and so we're quite bullish about what telematics.
Can do for our business and we'll press the accelerator in the coming months.
Okay. Thanks, Thanks, Strauss I guess second question shifting gears.
On your decision to combine the Canadian operations, the new us under kind of one roof, especially operations there under one roof.
Was that more of a of a marketing play to do so or are there maybe expected synergies that can come from from doing that.
You know.
The synergies.
In my mind are independent of the brand I think we have a.
Acquired the business and the U.S. and Mike Miller and his team have done a phenomenal job in my mind to really connect our value offering in specialty lines in Canada, what our value offering.
In the U.S. and I think Weve also established very strong cross border capabilities and in a number of segments like entertainment and.
Marine surety et cetera, we truly have a north American offering so it just makes sense at this stage to operate under one brand and a brand that is this thanks.
For specialty lines as we embark on the second leg of our growth in specialty lines.
Where we see a ton of a portion of the fees.
So in that segment broadly speaking so it was more you know people asked me when we did the acquisition how about the brand and I said brand as they too.
Well this is they too.
It's just the normal continuation, but from an expense synergy point of view you know we really have.
Achieved what we wanted to achieve with the U.S. platform and I don't know that we if you want to add some color on that point the branding exercise was not done with a major expense plain fine.
No I would agree with you Charles here are the most of the synergies were extracted early on I would say, maybe there's still a bit more to be done on the claim side internalization and process, but and that you are seeing so through quarterly as we improve the results, but the pure synergies were achieved a I will say probably in the first 18 too.
Only four months of the transaction.
Okay. Thank you guys congrats on the quarter and all the best going forward appreciate it. Thanks.
Thank you.
Our next question comes from Jeff Kwan from RBC capital markets. Please go ahead.
Hi, good morning.
Jeff.
Yes, I just had a question on personal auto pricing, just wondering where you see yourselves versus peers do you think there's still more room that they need to catch up to you on pricing.
Just trying to understand is like if we see further rate increases from then that could help your Paul.
Policies in force.
Debbie DPW growth.
Yeah.
You know Jeff this is sort of the question of the moment quite frankly because.
The team.
No and I were surprised by the strength.
Of our growth in.
In Q3.
And in fact, I think that was you know everybody is surprised by the speed of our our growth in a in first of all automobile in Q3 relief was largely in line with what.
We had guided before but clearly the new business flow.
Is very strong and then the retention is at an all time high and that's clearly a sign.
That.
You know the industry is catching up to some of the heavy lifting we've been doing over the past three years and and were entering and I think this period where growth comes at the healthier clip now that we're in the zone, we were aiming for.
And we're very happy to grow in this sort of environment. I'll ask is that then maybe she wants to provide a bit of color in terms of compare.
Competitive.
Positioning without sharing all the.
The tricks with our competitors, who always listen to those earnings call.
Thanks Charles.
Thanks to add to what you just said I think that fact that we were.
Fighting cost inflation at them identify our media a long period of time, we're already entering 2020 in a position of strength and then release measure we have put in place as threats our competitive positioning in a very good but and as John mentioned that.
Alright, and why we saw good growth in Q3, so new business levels are robust and that is to be expected to continue at this thing too far forward. There of course, there is that there are moving pieces, but we think our competitive positioning is very.
As we speak.
Yes, I think one of one of the nuance that does that get us just made.
Jeff is that you know.
We launched a big relief effort in late March.
We stepped up the relief effort in automobile and it was needs based and risk phase.
And I think what we've done in the second part of the summer is basically.
Reflected a portion of the relief that we want to provide customers in our rate position and and it's.
No clearly a the response is very strong so we're quite pleased with that.
Okay, perfect and just my second question was.
No, it's really small party business thats sitting on personal auto the decision to pull out of the BC market Im just curious whether or not it was something that happened. Maybe you did before you made the decision or after just if there's been any discussions with the government because obviously this is effectively reducing competition.
And what would you need to see for you to contemplate.
Contemplate reentering the BC market keeps you would you do it at some point in the future.
Yes, Oh, you're right that you know, it's not a big part of the portfolio and you know that.
We will give you a bit of perspective on on what it means.
From a top line point of view.
But no Jeff I mean, we've been at it.
For 20 plus years.
And as you know you're trying to compete on a small part of the market place against a monopoly was subsidized as one part with the other made it very difficult.
And you know, it's one of the areas of the organization, probably the only area the organization, where hope what's part of the strategy.
I'd say in the last year, we lost hope.
There it I think what would be needed.
And we've gotten the capabilities to serve the market place extremely well in BC, we're fully equipped.
To run I think the way to go NBC is open up.
Competition.
A cross across the board basically and and compete against the.
The the platform in place now but to compete in a small part of the market, which the monopoly is subsidizing is just untenable from a strategic point of view, we thought people were sort of.
You know eventually realized that the best thing for drivers in British Columbia would be to open up competition. We just don't see that happening at this stage and we've got so many growth unfortunate. These now on the platform that we've decided to redirect our efforts.
Where private markets operate effectively and where we can give customers. The best deal we can.
Okay. Thank you.
Our next question comes from John Aiken from Barclays. Please go ahead.
Good morning, Louis I appreciate all the guidance that you gave us for the <unk> for the fourth quarter just wanted to talk about outside distribution EBITDA. All for a moment can you remind me what the seasonality expected in Q4 given.
The expected drop off in the fourth quarter from the third quarter based on your 20% growth target.
Yeah. So I guess historically, it's probably in the 24, 25% or a quarter of the earnings in the in the fourth quarter.
So that would be historical having said that it fluctuates a bit based on when the the brokers will record some CPC and so we have to be careful with the variations and the guidance. We I provided earlier was really meant to say.
There's 46% growth in the Q3 don't let's not carry this over into Q4, because that's not what it how it's going to work so.
This is what we're trying to sort of clarify and giving the overall year.
The guidance if you want so I'd be careful normally I would say you'd expect to have a light Q1. The heavy Q2 and then the other half of earnings spread between Q3 and Q4.
But it does vary a bit and I want it to be a specific enough. So that you have the right idea of what Q4 will look like in terms of what we expect.
Fantastic. Thank you and then in terms of the the personal auto claims ratio. Obviously, we saw a step back and warm quarter because of the number four kilometers driven but are we seeing the increasing the claims ratio is that actually commensurate with the amount of kilometers driven of course.
Next the impact accounts.
Yes.
Then maybe you want to.
I think in the context of Canada, it's always better to compare quarter.
One year from the next because there are seasonal patterns.
Here and.
He said why don't you explain high level.
The underlying improvement and in personal auto and how it's largely breaks down and then we'll give you a perspective on what's driving.
As shown.
Throughout the summer right until today.
Thanks.
Sure so in terms of looking.
Looking at the improvement in the underlying loss ratio in Q3 versus the same period last year, where we thing about nine points of improvement and we estimate that treat cart quarters of this improvement is coming from our actions. So me right action risk selection actions and claims actions.
Beginning in the back.
So and that the remaining quarter would be explained by the benign cost environment, that's where our hand due to the pandemic net of the relief, we gain and a different mix of plane. So.
So that's what.
We we see in our improvement versus last year in terms of driving what I can say that since April as we said last quarter driving is returning forget CV. Since then and ink at an increasing pace. That's when I read that would say a bit by province as governments.
That were either reopening the economies are at adding new restriction at different points in time, but says that summer, we're still seeing that driving involve increasing I would say that as we speak today within a below normal levels in terms of.
Moving and in terms of frequency at the driving was increasing and we said that in Quincy also increasing at the same time and since at the end of the summer frequency has stabilized as well below normal levels. So that's what we see today.
But driving is no you know sitting here.
Within 10% of what it's been.
Historically.
Basically.
Severity is up a bit but driving is roughly within 10%.
No fluctuating across the land.
Thank you I'll requeue.
Thanks.
Our next question comes from Brian Meredith for me please.
Please go ahead.
Yes, Thanks, Chelsea I'm, just curious you know youve talked about this a little bit, but I was a little surprised at the outlook with respect to personal auto direct premium written growth for the fourth quarter.
It's just kind of mid to high single digits I would have thought without any premium relief coming through would it could be double digits, you, maybe a little color on that.
Yes.
You said that you want to provide a bit of a bit of perspective there.
Yes, sure so as we explain a bit our near a Q2 growth at 8%, including the bank of relief was really driven by our improved competitive positioning and driven in part by area retention.
So and that's why as we are sitting here today, our best guidance.
Q4 growth would be mid to single at mid to high single digits for Q4, knowing that we have.
Moving on Weve moved from our release program to REIT strategies, and as I said I expect that and other payers may continue to move as well. So that's why our guidance is on line with the growth we saw in <unk> in Q3.
Got you. So competition has picked up so I guess, what you're saying.
Well I guess I'm condition is reacting to maintain.
[music].
Gotcha Gotcha, and then Charles Im just curious your guidance with respect to the personal auto combined ratio next year kind of the low end of the mid to low end.
No idcs, you're talking about is that contemplating some normalcy in the in the claims frequency environment.
No I think that we're expecting that will be a bit in a low.
In 2021 from me driving and frequency point of view and we do expect a return to normal driving level that is bridging the small gap we're seeing now.
By year end.
To a certain extent that is reflected in our temper.
Temporary price position, which were equipped to reverse shouldnt driving return back to normal, but when I look at the overall.
Cost environment at the moment and some of the work that we've been doing which is flowing through our performance in mix and quality of portfolio. We think we'll be at the low end of the mid nineties sort of range.
For the foreseeable future.
Great. Thank you.
Okay.
Our next question comes from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes, thanks very much morning.
I've heard retention mentioned more on this call the normal and.
Your question that some of the pre.
Premium relief measures are helping with retention. If you can clarify that is that strictly in personal auto and.
What's going to happen, maybe you can put some metrics around retention as well.
To show how much it has improved and what's going to happen when somebody's relief measures kind of where you think the retentions.
Change at all and have you experienced with retention like outside of personal auto personal property or needed commercial where youve given some hard pressed industries.
As well and that yeah. Thanks.
Yes, Don I will ask is that bad and Darrin to share a perspective on what they seem their respective lines of business, but I would say from my own point of view historical high.
Across the board in terms of of retention and I think it is a function of tight market capacity in both auto as well as a as a commercial lines and and the heavy lifting we've been doing for three years, which is also you know.
Slowly eroding from a competitive disadvantage point of view when all of this is paying up but why don't we kick it up with Darrin in commercial lines and then we'll go to exhibit.
Tom So as you would expect I mean, obviously the different sectors.
Within the portfolio experiencing.
Experiencing.
Different profiles, given the economic realities of the crisis today. So when you think about.
More on these are more vulnerable customer sites, you can think about hospitality and retail we do see a little bit of pressure there from a cancellation standpoint, I'm not not material, but but definitely there is a little bit of pressure there on the other segments of the portfolio, which are not as impacted by the economics.
We see either flat or slightly improve retention.
So again, it very much depends upon sort of where we're at sort of economic cycle standpoint.
New business levels I find to pick up as well too. It's a reflection of I think capacity challenges within the marketplace, obviously, we're being very cautious and prudent relative to quality, but definitely I think the growth profile is changing a little bit but again it's.
It's difficult to make broad brush comments, because it is very much sector by sector.
That we're watching very very carefully obviously I mean, obviously you saw the announcement around that relief program that to further support our most vulnerable PNC customers. There are 100000 customers coast to coast. So we believe that will help as well, but again, we're monitoring wife to be secure and.
Modulating rights as we need to based on the crisis as that unfolds.
But Tom maybe if I put some numbers on that Darren correct me, if I'm wrong, but historically in commercial lines you'd be in the upper eightys in terms of retention in units, but isn't units I'm talking about and.
You know if you look at.
September for instance, you're in the 91% range show a couple of points of retention change like this is a is very good because we know that the more loyal slash mature business, it's always better business in terms of loss ratio performed.
So a nice pick up.
In in commercial lines, that's look at personal lines.
You got it.
Yes, so as you mentioned part of that.
The various form of relief, we provided was that in the right tempering our rate increases that trend you all and that's it.
And retention to be increase accordingly, so in both lines I would think so in persona. The way of example, a bit like child.
Mentioning in commercial we were running in the upper Eightys and low ninetys retention ratios in units and in Q3, we saw as an example, the retention we riccio, increasing close to 94% so meaning that we're keeping 94% of our clients.
When you're all aware that that's one of the I guess point, we saw in retention in the last 24 to 36 months. So that contributed to the growth we saw in Q2 in personal lines in general.
Yeah, and I would say is that then what can you say 24 to 36 months I would I'd.
I'd go so far as to say probably 20 years.
90, 890, 394% combined return.
Retention.
In personal automobile is extremely high and we're seeing very strong retention in both.
Both channels. So we're quite pleased with that and in fact, if you look at what most people expected from a top line point of view and auto.
And what we expected versus what actually happened I'd say, 40% of the spread.
In in expectations was driven by retention.
40% of the spread then was driven by new business generation, So very pleased with what that.
Okay. Thanks, and then the second question has to do with that.
Disruptors, we just saw another one kind of come out here IPO recently, Ruth got lemonade and some of these aren't necessarily in in Canada, but they are potential disruptors or to what extent, maybe amazon or Facebook might come into that play as well I mean, the habit the social media in a market that we get.
So the distribution edge.
And that you know can they replicate your pricing and segmentation edge as well.
What are you doing to defend your user base against potential Disruptors.
<unk> is a is it simply just by trying to change mix. So we're at all.
You can discuss some of the points around that.
Sure.
I think Tom.
We've been focused on disruption.
For 10 years I would say we've been far more focused on preparing for disruption then.
Then competing with our existing competitors.
Quite frankly, and you know.
No.
For disruption to actually take effect you need in our book two things you need better design.
And you need better value for money.
And so.
You know if you've got both than you can promote it at scale.
I've got a good shot at potentially this.
Disrupting so if you look at the agenda that we've presented with investors over the past decade.
You will see that there has been lot of focus on the digital tools the role of our design lab.
And the customer experience broadly speaking you'll have seen that we are drilling.
Dramatically.
Changing the experience in the direct channel through our insurance simplified project and you've seen in the direct channel big drop in the expense ratio.
To make sure that we can compete on affordability.
Or just value for money if somebody came in to do things dramatically differently, you've seen us invest agreed.
Aggressively in our brands both in title insurance and better direct who are two leading insurance brands in the country and the other thing you've seen done is.
A big focus on creating optionality in distribution, you've seen us build in fact insurance then bring in fact entrants online.
Even though we distribute through brokers you've seen the build up of their direct then you've seen us build.
A massive personal lines distribution platform with multi options.
Which also provides a ton of up up optionality.
So that is on the.
Sales or distribution.
Distribution and customer relationship side of things.
The other edge that is very significant.
Is the product, we actually deliver and by that I mean claims our perspective when it comes to disruption.
That.
The work, we're doing to get our customers back on track.
In the physical world.
Is quite in differentiating.
And so it is depreciating from a cost point of view and it is different differentiating from an experience.
And if you said the whole in sourcing of the supply chain process and taking in charge the experiences we see a differentiator wit.
With often how people see the claims process has a financial transaction, we don't see the claims process as a financial transaction, we see the claims process as getting our customers back on track and we build quite a force there.
Last point I would make Tom is the importance of that data.
In the disruptive process and as you know you could say were a data shop weve been harvesting our own structured data sets for decades, we're tapping into unstructured data sets, we're tapping into external datasets telematics is a great example of.
The massive program.
That we have built and its all backed up by a huge team of a machine learning experts and our data lab a few hundred people. In addition to the data experts that we have in the rest of the organization.
And so when you stack all that together.
I would say.
No. We're paranoid of course, that's that's our makeup but you know were quite equipped to the phase distribution and the last point I would make.
In terms of Optionality as you've seen in the past three four years.
A lot of emphasis on commercial lines specialty lines and opening up a big pipeline of growth.
In that segment to make sure that should there be grilled pressure.
In personal lines in part because of disruption or change in in how people move.
We've got big pipelines of growth.
Outside us well I you know I don't think we there's of the bed dependency on that but our strategy is one of a plenty of optionality.
Okay. Thanks, so much for the color.
Desert.
Our next question comes from Mario Mendonca from TD Securities. Please go ahead.
Good morning, everyone first on I want to clarify it some guidance you've already offered I think you said that.
You'd expect mid to high single digit growth in direct written premium personal auto in Q4 that did I hear that correctly.
Yes, you did.
Thank you and can you offer anything about 2021.
Because presumably the premium relief will continue through.
Would I be correct in saying the entire year or at least the first off from there.
Yeah, I think that's fair Mario I would.
I'd be inclined to think about 2021 in the mid.
Single digit range. The thing you need to keep in mind is that the exit of BC.
It will be I think appointed enough that we can you confirm.
What's the right sales.
Yeah.
So look or an area, we've been surprised by the pick up so to speak in the last two three months.
So you know, we're thinking about auto with B C. In the mid single digit range in 2021, but subject to adapting to the environment. That's our best guess at this stage and that's that's despite the premium really.
Yeah, that's all in.
So let me help me think through Ivo I've been on the notion that at some point the frequency would increase.
Or returned to normal premium relief would still be in place and they could result in some lumpy quarters. I think that was the word you used to describe this really running the process is that no longer or your view is it fair to say now that the premium relief is.
Is being matched up with a gradual increase in frequency there is nothing really abrupt happening here that could cause.
Lumpy quarters.
We don't see a abruptness I think what we see Merial with you know a running the business of course, taking seasonality into account.
At this stage at the low end of the mid nineties.
But we don't expect too much lumpiness as a result of a relief at this stage that you want to add any color to Marios question.
I think you're right child, the only he got out with love is that we also have a I mean, a increased momentum going on so even if we have really that wasn't behind it to throughout Q4, and 2021 will step out earning trees momentum on top of the benign cost environment. We are operating.
Again, so I think.
Thats why were believing that wouldn't be able to upgrade at the end of the meeting 19 range in person.
Yes keep in mind. There you know there was a lot of heavy lifting done pre cobot here that is still earning through the system.
Okay. Thank you.
Okay.
Our next question comes from Paul Holden from CBC. Please go ahead.
Thank you. So first question I want to ask because regarding the distribution EBITDA.
So the guidance for the year is helpful. I'm wondering if you can help us.
With those contingent commissions, how much of that out it to grow.
In 2020, and what I'm really trying to get to here is.
For 2021, the growth is likely going to be a little bit below normal because of that and that's the that's what I'm really trying to solve for so anything you can help us on contingent commissions or otherwise would be would be appreciated.
Yeah, that's I I think.
Profit sharing.
Andy but we why don't you on that portfolio.
Sure Paul So, let's let's unpack year to date.
As one example here were around 23, 24% growth.
About 10% is our existing broker plant, what we would consider organic growth and that would include the impact of CBC.
Then you have about five points, which is the result of M&A. So the inorganic impact on broker link and our other brokers.
And then the remainder would be the impact of adding on site and FCC.
So that's that's roughly the.
Three main components a that we expect.
Going into next year, and the pace will slow, but it's still expected to be a fairly healthy growth pace and this the the sharing here. It's a force onsite and FCC will become organic I would see here the M&A.
The impact is probably similar to what we've had year to date, so mid single digits area.
And then we do expect a higher contribution from onsite and FCC next year.
We'll juice up at the growth and that's simply accelerating your earnings are mostly at the onside side a into a 2021.
So I would say next year, an expectation, probably a slightly above 10% and split between organic EBITDA of and then M&A and then top up with the onside and this is.
Perfect Thats very helpful.
Second question is related to.
Net investment income, obviously seeing some pressure on.
Refinancing rates.
I guess the question is are there any shifts shoes that are taking place in investment portfolio to offset a reinvestment pressure.
Hi, there actions taken to date or things you're contemplating.
Over the next 12 months.
I don't expect major shifts in the ports portfolio. These are we'll see tweaks here and there.
The portfolio, we're very cautious as you know and there is you know some some pressure clearly going one way, we're seeing a bit of erosion on the other side the growth in assets. So to some extent they offset each other and help us sort of alleviate the pressure here, but you would not fixed.
Picked us to take should not expect us to take massive moves here in terms of our our asset mix or investment style to to choose higher yields we do on the margin, but it's not a huge changes and it doesn't move the risk envelope.
Very much.
I know in the contrary on the contrary I would say that we've taken you know a cautious position on the asset side of the house.
Early in the crisis to be able to defend against volatility.
But also to make sure that.
At all points in this crisis, we wouldn't be in a position to take advantage of unfortunate. These so a reaching for yield and extending the risk envelope has not been one that our approach to date.
Thank you for that.
Our next question comes from Doug Young.
<unk> capital markets. Please go ahead.
I get to say good afternoon.
[laughter] to add two questions here in Charles I know I've asked you. This.
And comes and goes but you know given what I've read in the global mail and and all that.
Maybe place always go to you but are you at all worried in Canada, how about the commercial market becoming regulated.
And has there been any discussion around that with.
With the government or with the regulator.
Thanks, Doug look I think the the commercial lines market no I'm not worried that it becomes a regulated from a pricing and product point of view.
I think that and the reason why you know I'm not overly worried about that is the fact that.
You know coming into this crisis.
The market was tight meaning that the industry, our OE was single digit.
And a commercial property was under and commercial PNC was under pressure right was liability inflation in the system and then the impact of a natural disasters put a fair bit of pressure on property and.
There has been 10 years of sub market in commercial property now people forget about that now, but there has been 10 years of hard Mark a soft market.
In in commercial PNC.
Net coal that happens and.
The investment income, but then should it comes down you get a fair bit of pressure on the.
Claims side of things so we've reserved for all of this in Q1 were in good shape, but the industry is under.
Has been under pressure as a result of claims so clearly the capacity issues that existed.
In the first place I've been exacerbated by co bid and then you layer on top of that the demands that reinsurers have made.
In terms of wording and so on.
To acknowledge that there are areas of the market where capacity is tight.
With Covance, there's been a number of class actions.
On long term care facilities for instance, and ER and then there's moral hazard a vacant buildings that is also an issue so.
Long story.
But I think the nuance is important here in the high risk areas of the market take bars.
Restaurant, but heavy liquor liability.
This part of the market.
Was largely served by foreign operators.
And a number of them left and.
And this has led to a capacity crunch only small very small portion of the market because its still very competitive in commercial lines.
But a number of foreign operators left and a this has created a bit of essentially no I don't think you bring capital back.
In the industry.
By regulating the problem is capital that's left not.
Not people are doing extremely well in commercial lines and I think that people understand this dynamic that being said solutions need to be found so we're leaving a solution.
With the industry.
To ensure uninsurable risk and there's a number of mechanisms that are being put in place to address the issue here, but I don't think regulation will solve the problem its not.
That people are overcharging, it's because capital that's left the system.
And I don't think scaring insurers as the way to bring back capital in the system and that's my sort of analysis of the situation.
You know we've been providing a ton of really in commercial lines were growing our commercial lines platform, we've frozen rates for.
For vulnerable customers, we've just announced a 50 million dollar.
A relief program.
You know in that space and and quite frankly the large.
Good leaders in the market place are stepping up at the moment the issue as number of foreign operator in the high risk base has left.
[music].
Okay. So it doesn't sound like the regulators really done.
There is no discussion going on like I get all your explanation.
Absolutely logical.
I always think of regulatory logical, but it doesn't sound like that's a real concern you're having right now.
No I think that there is a dialogue.
And where capital S. left assist then we need to find solutions.
And that's where the dialogue is taking place.
But uh huh regulation won't sell the system it'll make it work.
Worse, if not far worse, if you want my opinion.
And my second question is my question.
As we see them.
The industry you quoted the industry being line ratios of 100% or are we still around 5%. It doesn't seem like that's really improve materially despite some of the favorable headwind by 2020.
On the.
Right and we're seeing some good results out of Europe, and some of the others is there a certain segment of the market Thats really performing absolutely horrendously, an uncertain segment of the market Thats doing really really well.
So price yeah.
Yes, so I think theres two things Doug one of the things Weve seen in the first half of 2020.
Which you know where are we surprised yes or no I don't know but.
Adverse.
Development from the past and automobile insurance has been a problem.
And.
No we've been at it since 2016, there's a lot of heavy lifting you've seen us take a cautious stance in reserve a few years back.
I think that is taking place now at the industry level.
Such putting pressure on the overall performance and automobile insurance, even if you could expect the benign sort of cost environment.
Our commercial lines performance.
Overall first half of 2020 has been very bad.
At the industry level. So you know depending on on the province in which you operate you see 105 110 ish type.
Type performance in commercial lines and and that's why you know my view is you've got a capacity issue period. Unfortunately for us.
And but that is the nature of the of the market and hence the Industrys result.
I expect things will get better.
This year, but.
But there was a fair bit of digestion to do in this industry to return to historical levels of outperformance from Anoro, We point of view and that's why our view Doug Yes, Ben you know.
When we were asked before the crisis all long will the hard markets last Darren had done a very good analysis last year to see we think it'll be 24 months.
And you know this has been put on pause to a certain extent you know depending on the line of business, but there's a lot of work left to do to improve the performance and.
And the attractiveness of this industry for say average players gladly, we've done that early on and now I think the topline is benefiting and be a the bottom line is doing.
Well and.
That's how we operate as a firm we've shown that in the past and and trying to to win in this environment.
This concludes the Q and a portion of our call I'd like to turn it back to Kent Anderson for final comments.
Well, thanks, everyone for joining us today.
On the call a telephone replay will be available for one week and the webcast will be archived on our web site for one year. The transcript will also be available on our website and depend on some reports and filings archives and closing our fourth quarter 2020 results are said to be released after market close on Tuesday February nine.
Thank you again and this concludes the call for today.
Ladies and gentlemen, this doesn't conclude today's conference. Thank you once more for participating you may now disconnect.
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