Q1 2021 Intact Financial Corp Earnings Call
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Good day, and thank you for standing by log on to be intact Financial Corp, Q1, 2021 results conference call.
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On the conference over to your Speaker today, Ken Anderson Senior Vice President of Investor Relations and corporate development. Thank you. Please go ahead.
Thank you Mike Good morning, everyone and thank you for joining the call today.
Through our live webcast and published information for this call and posted on our website.
<unk> 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 <unk>.
Eight three for a note on the use of non <unk> financial measures and important notes on adjustments terms and definitions used in this presentation.
Our executives are again, joining us from across the country in Toronto, we have our CEO Charles from Tomorrow with me here in Montreal are Louis Marcotte, CFO, Isabelle Girard SVP of personal lines and Patrick Barbeau SVP of claims.
I'm from Calgary, Calgary, we're joined by Darren Godfrey SVP of commercial lines will begin with prepared remarks, followed by Q&A with that I'll turn the call to our CEO Charles for anymore.
Thanks, Ken and good morning, everyone. Thanks for joining us.
For over a year now our people customers and society you have faced incredible challenges.
Were thankful to health care professionals and frontline workers.
Oh supported all of us throughout the pandemic.
And while the vaccine gives us hope that well see some return to normalcy in the second half of the year.
It's really important that business has continued to protect and support their employees.
And the communities where they operate.
In March we introduced a new relief programs for our personal auto customers in recognition of the continued lockdowns.
This 75 million dollar of additional relief complements our existing and ongoing measures to protect and support customers most impacted by the pandemic and.
And brings the total amount of relief to over $600 million.
We're committed to be there for our customers in both good and bad times and our ability to provide meaningful relief is enabled by our track record of outperformance.
Now, let's turn to results.
Last night, we announced first quarter net operating income per share of $2 48.
A 49% increase over Q1 last year, driven by strong underwriting and distribution performance.
Top line growth of 1% was tempered by tree point of relief.
And three points from exiting BC and one large contract.
The overall combined ratio was 89, 3% with strong performances on both sides of the border.
In Canada, the combined ratio of $88 two was driven by continued strength in underlying performance and benign weather.
Set by four six points of relief.
In the U S. The combined ratio of 96, 3% included seven six points of cat related to the severe.
And unusual winter storm in Texas.
Our underwriting and pricing discipline, along with our strategic focus on growing distribution earnings.
Led to five on bread and 70 basis points of ROE outperformance last year.
Again surfacing.
Our 500 point objectives.
Canada would beat the industry combined ratio by five points with broad based outperformance in auto.
We beat our benchmarks combined ratio by four five points.
We seek to outperform not just an average but everywhere we play.
Yeah.
Let's now look at our results by line of business starting in Canada.
Personal auto premiums declined 8% year over year, excluding the additional relief and the BC auto exit.
Growth was about 3%.
Net combined ratio of 93, 4% was in line with our expectations given the 9.3 point impact from customer relief.
Overall, our personal auto business is really solid and I expect it to deliver at the low end of our targeted mid Ninety's range. This year.
Looking at the industry insurers on prudently slowed rate increases to reflect the reduced driving activity.
While competition remains consistent.
Given the weakened the street performance over the past three years, we expect corrective measures to resume.
Driving activity returns to historical levels.
Okay.
In personal property premiums grew 6% driven by firm market conditions and modest unit growth. The combined ratio at 77 four in the quarter was very strong.
And it was helped by benign weather and favorable T y.
With the actions we've taken over time I do expect this segment to continue to operate sub 95 every year, even in bad cat years.
In commercial lines premiums grew 5%, reflecting hard market conditions and strong new business wins.
When we adjust for the loss of one large contract.
<unk> growth was approximately 10%.
The 91 per cent combined ratio was solid reflecting swung rate actions and the <unk>.
Ongoing hard market.
Q1 combined ratio included two points of earned relief from 2020, which offset the higher than expected favorable P widened in the quarter.
Our commercial lines business is performing very well.
And I expect this segment to deliver low ninety's or better going forward moving to our U S. Commercial lines business premiums grew a solid 6% on the quarter driven by the continued.
Alright and market conditions.
And the benefits from recent tuck in acquisitions.
When we adjust for timing change from Q1 for Q2 for a few large renewals growth is actually closer to 11%.
On a combined ratio of 96, three was solid considering the elevated cat activity I mentioned earlier.
This is positioned to deliver.
Sustainable low <unk> performance as we remain focused on portfolio quality and capturing rates in the current hard market.
Turning to RSA.
We're nearing the June 1st closing day, and we're ready to hit the ground running.
Areas of focus for us are building the best team.
Integrating the business.
And creating value.
And we look forward to welcoming the RSA folks into the intact familiar in three weeks.
The teams are collaborating really well as we work together to put the final touches on the integration and transition plans.
Were also finalizing our leadership structure with the name to further strengthen our bench.
Top talent and operate with the best team in the insurance business on.
On integration and value creation. Our teams have performed detailed bottom up planning to ensure we can immediately begin to deliver on our strategic and financial objectives.
In Canada, we have a proven playbook for the integration and it's where we expect to capture three quarters of the added value.
In the U K and international business, we're zoning in on the a portion of these to leverage our core capabilities and on.
<unk> scale to build out performance over the coming few years.
In specialty lines, we are well advanced on mapping out how.
How will best leverage DNS distribution and global platforms will have following the close so overall, we're well positioned to hit our net operating income per share accretion targets.
Which have us reaching high single digit in the first year and increasing to upper teens within 36 months.
The deal will generate than I are well north of 15% our stated objective.
In North America, we're continuing to invest in our business to drive out performance and to build earnings momentum.
Non strategic area of focus is growing our stream of distribution earnings.
For the past five years distribution EBITDA has grown by 17% per year on average and we expect to generate well over 300 million this year.
Our brokerage broker link has more than doubled its business since 2015, thanks to both solid organic and active pursuit.
Inorganic.
Growth with.
With ambitious goals on winning new business and a healthy acquisition pipeline I see a lot of a fortunate for the broker linked team.
The MGA space, Frank Cowan company, which we have rebranded recently to intact public entities is performing well and we're putting underwriting capacity behind it.
We'll continue to leverage our investments in distribution to expand our north American footprint in specialty lines overall.
Overall, our distribution EBITDA generated 170 basis points of ROE outperformance last year, and we're continuing to build scale in this unique competitive advantage.
Our customer driven digital strategies, helping us engage with our customers like never before.
I'll also leveraging data to bolster outperformance.
Digital adoption accelerated significantly since the start of the pandemic, we've increased the number of customers using our client center up by north of 60% year over year in the broker channel adoption has more than doubled and while our direct business. He's tree out of for customers now actively engage.
Aged digitally with us.
As customers adopt our tools and the experiences we provide we see benefits on both the claims side with over 40 per cent of appraisal smell done virtually and on the telematics side.
As we continue to gain scale on the digital front.
It's certainly further expands our ability to leverage data and AI.
Working with our 370 strong data lab to further our outperformance.
So in conclusion, we started 2021 with a lot of momentum across the business.
<unk> is up 49%.
Book value is up 20% year over year, and we produced a 19% operating Roe.
Over the last 12 months, our teams are very engaged delivering an outstanding customer experience every day and working hard to ensure that we hit the ground running when the RSC deal closes.
We know it's been tough for everyone, including our employees, but we're starting to see light at the end of the tunnel.
We are quite optimistic about the months to come.
A big thing.
To our employees for really stepping up and pulling true and to our RSA colleagues. We look forward to welcoming you and to working together to strength our outperformance further.
Over the past decade, we've compounded at.
At over 10% a year and beat the industry ROE by 680 basis points on average yearly.
With strong momentum in our business a robust game plan to capture the benefits from the highly strategic RSA transaction.
I think we're well positioned to continue to drive well into the future and with that I'll turn the call over to our CFO.
Mr Lewin.
Thank you Mr Brin day more.
Good morning, everyone.
While the pandemic has had a severe impact on people and communities coast to coast I am pleased to see the progressive return to normal has started we remain.
Committed to supporting our customers brokers and employees throughout these difficult times.
With this in mind and then an additional relief program was launched in personal auto to assist customers, who need it most and to reflect the temporary change in driving habits.
The cost of the new release program was estimated at $75 million and impacted ifc's topline by three points.
The relief was entirely written and earned during the quarter.
And any amount claimed in excess of the $75 million recorded in Q1 will be reported in Q2.
We expect any amount to be fairly modest.
Let's now turn to our Q1 operating results.
First quarter net operating income per share of $2 40 was up 49% from last year on the back of strong underwriting and distribution performances.
Underwriting income grew 87% over Q1 last year with strong performances across the business.
The quarter was characterized by strong underlying loss ratios, thanks to our continuing profitability actions bins.
Benign weather and strong prior year development.
Net earned premium in the quarter were down 3% due to the impact of $157 million or roughly six points on a premium relief earned in the quarter, including the $75 million discussed earlier.
For which offset the impact of reduced driving activity.
With regards to prior year development.
We expect Q1 to be a bit more volatile than other quarters due to its proximity to prior year.
But we maintain our long term expectation that prior year development will be favorable and in the 1% to 3% range.
On the short term given the strong start in 2021, we should finish the year at the upper end of this range.
Net investment income of $141 million was stable compared to prior quarters, but was $9 million lower than in Q1 2020, as the crisis led to lower interest rates and dividend cuts.
For the remaining quarters of 2021, and excluding the impact of RSC.
We expect quarterly investment income to be comparable to Q1 2021.
Distribution EBITDA and other income grew a solid 41% in the quarter driven by strong underwriting results profit sharing commissions and accretive acquisitions.
On the back of these results, we are raising our full year distribution EBITDA growth expectations.
Mid to upper teens.
RSA, we will have a positive impact on distribution income however.
However, this will only begin in 2022.
Looking at a few areas in more detail.
In personal auto the combined ratio of 93, 4% was strong despite a nine three point impact from current and prior year earned relief.
Prior year development improved one five points half of which was due to pools.
On expenses the overall Canadian expense ratio of 31, 7% increased two four points from Q1 last year.
Half of the increase was driven by the impact of relief measures on net earned premiums with the balance coming from higher variable commissions, consisting consistent with the strong profitability in the quarter.
The overall U S expense ratio of 42% was largely in line with our expectations, reflecting the business mix and seasonality of our operations.
IFC is earnings per share for the quarter of $3 51 were significantly above last year. Thanks for the strong operating results and the nonoperating gains recorded in the quarter.
Included in these gains are $273 million pre tax from a ventures investment that went public in February.
The investment is now accounted for in the same way as our other publicly traded equity investments and is held as available for sales.
As such any unrealized gains or losses are captured in OCI and book value.
Moving to the balance sheet, we ended the quarter in a strong financial position with a total capital margin of $3 billion and all financing for the RSA acquisition fully secured.
<unk> the $250 million of subordinated hybrid notes issued on March 31 of this year.
Our book value per share increased 20% year over year to $62 19 on March 31, reflecting strong operating performance and Mark to market investment gains followed following the market rebound over the past year.
Let me now provide a few comments on the RSC deal as we continue to drive towards a June 1st close.
First from a value creation standpoint, we expect immediate occur.
Accretion for the first months following close this will come from a combination of adding RSA as existing earnings two hours as of June 1st and a small share of the synergies we expect to generate over time.
Our visibility on the expense synergies is improving steadily as we approach closing and viewing further confidence that we will deliver on them as clients.
These synergies still do not consider the loss ratio improvements driven by the benefits of our data and analytics advantage.
Our Q2 results will include one month of <unk> operating earnings, which we will report in aggregate in our corporate and other segment.
Both underwriting and investment income net of financing costs will be included in our pre tax operating results. This.
This will include the results of U K, and I, Canada and Denmark.
From a balance sheet point of view at close we will consolidate our assays entire balance sheet for the parameters we are acquiring.
Our investment portfolio will grow by some $15 billion following close and reach a total of 35 billion.
As usual following on following an acquisition the yield on the invested assets acquired will be reset and the investment income going forward will be consistent with current yields we expect the.
The acquisition will generate approximately $100 million of additional investment income prior to any asset mix for the seven months in 2021.
From a book value point of view on November subscription receipts offering of four and a half billion dollars will be converted into common shares and added to our book value upon close when combined with the impact of the purchase price accounting and deducting financing fees.
We expect the book value to grow by some $4 $6 billion and the share count by 33 million shares. Consequently, our book value per share will grow by approximately 25% on close.
That's roughly 50% higher than where we were a year ago.
The financing of the transaction is entirely secured and we continue to expect our leverage ratio to be below 26% that close and return to 20% within 36 months, we will undertake to optimize the capital structure of the group, including the replacement of acquired obviously debt where appropriate.
Starting in Q3 and going forward, obviously as underwriting results for Canada will be reported in the Canadian business within each of our existing lines of business the.
On the underwriting results for U K and I will be reported under a new segment with personal and commercial lines granularity.
We will continue to report separately on our U S commercial segment and the results of Denmark will also be reported separately.
In summary, we will pick up additional earnings from June 1st and for seven months in 2021 synergies are expected to be generated immediately and accumulate gradually over three years, reaching a run rate of 250.
$50 million pre tax.
We continue to expect high single digit accretion for the first 12 months seven months of which will impact 2021.
Accretion should reach upper teens within 36 months.
After completing the transaction the operating ROE will be lower than current levels as the OIBDA accretion in year, one is lower than the book value per share of accretion as we get closer to year. Three we expect the operating or we could be running at a mid teens historical average as synergies fully kick in and we see upper teens and OIBDA accretion in our results.
With an IRR well north of 15% solid earnings accretion and a price below book value the financial merits of the transaction are compelling.
But the proof is in the pudding was <unk> 75 per cent of the transactions value creation coming from Canada, We will lean on our successful track record of Canadian integration to deliver on our targets.
In the U K and I segments, Scott Egan and team have been improving the performance over the past 24 months and this momentum continued in the first quarter of 2021.
We are looking forward to joining forces with Scott's team and supporting their efforts to build a solid outperforming business in the UK ni markets.
The addition of RSA to our strong operations is highly strategic and transformational our teams are already hard at work to ensure we deliver on our expectations and now the real work begins with the help of our new colleagues at RSA, we can create a tremendous amount of value for all stakeholders.
Finally, the acquisition positions us well to continue delivering on our financial objectives of growing at 10% annually overtime and beating industry ROE by 500 basis points annually.
With that I'll turn the call back to Ken.
Thank you Louie in order to give everyone a chance to participate in the Q&A, we would ask that.
You've kindly limit yourselves to two questions per person if there's time at the end you can certainly re queue for a follow up.
Mike we're.
We're ready to take questions now.
At this time I would like to remind everyone in order to ask a question press star one on your telephone.
Try your question press the pound key.
Please standby, while we compile the Q&A roster.
Your first question comes from Jamie Klein from National Bank.
Yes, thanks, and good morning.
Good morning, Jamie.
My first question.
Actually on that from the guidance. Louis that you just provided around net investment income.
And I just want to make sure I heard it correctly that.
Net investment income coming from the RSA transaction would be about 100 million for the seven months in 2021 and.
And if I heard that correctly.
I guess that suggests it's quite a bit of a step down in the yield earned on those assets more than what I was actually anticipating.
So is there anything that you are looking at doing.
To potentially improve that yields and drive that investment income higher.
So Jamie it's a good question and I am happier raising it so as you know and this was my point about the fact that we have to reset basically the book yields to current yields at the time of acquisition.
So what happens is their book yield right now is higher than the reinvestment yields and when we when we take over the balance sheet, we need to reset those yields to the current yields and then the investment income will be based on current yields. So that's a step down from what the earning now now it's on their balance sheet and they are seeing there is a what they call the bolt on <unk>.
<unk> impact that day.
They are impacted with.
Net this out and then we start fresh from the date of acquisition at current yields and those again are lower than the other than their book yield so.
That is really what happens from the acquisition all of our modeling has been based on that so it's not a surprise to us.
But.
Certainly wanted to flag this is.
You guys are modeling for the future.
Okay.
Follow up on that is.
Just related to there.
I guess there the average life is there.
Or is there an opportunity to more quickly rolled that portfolio into higher yielding assets based on a maturity that might be lower than the current intact book.
So.
The the work is being done right now to optimize the asset mix into position I think there is.
Strong feeling it was well a very well managed already we R&D UK environment with their own rates environment.
So the numbers I gave there were prior to making asset mix changes. So we are looking into those I don't think youll see a massive change in the asset mix, but there will be a bit of shift, particularly in that market towards a bit more equities because they are right now on a fairly conservative portfolio structure.
Okay, Great and then my second question is just around <unk>.
Unit growth in that in personal lines I think they are down in personal auto on the BC exit and then personal property slowdown probably related to.
Just the GCN acquisition last year can you just talk about how youre feeling about unit growth in that in personal lines and how that looks.
Heading into the rest of the year based on some other moving parts with COVID-19 and in pricing and competitiveness.
Jamie we're feeling good about our position in the marketplace.
And we do expect our momentum on that front I would say unit wise youre, probably talking about low single digits and maybe you said that I don't know if you want to add any color. We're comfortable growing in this environment, we're comfortable with our price position and and we're on.
They're in the market trying to grow the business you said that.
Yes no.
And you're right Charles.
I would just add that.
As you mentioned in a total of.
<unk> has an impact on units on the underlying growth removing the BBC. In fact is quite consistent with what we saw in Q4 and on that same friends for the appropriate DB, you're also right that the.
Do you see any impact is not there anymore in Q1, so the underlying growth also is for.
I mean, you're very strong in Q1 and for bolt on.
Those lines that mid single digit number is what we're looking for for the quarters.
Quarters to come.
Great. Thank you.
Your next question comes from Geoff Kwan from RBC capital markets.
Hi, good good morning, My first question was on RSA.
For for the countries that Youll now be operating in just wanted to get a sense of.
Do you need more time to kind of assess.
Your strategy on either improving them or pursuing alternatives and if you do need some more time like how much might that be.
Doing that exercise.
Yes.
I think we're pretty clear about what needs to take place in 2021, Jeff.
From the perspective that for most markets we are.
Putting the final touches of how outperformance will be built and I think there's a couple of areas, where we're exploring strategic alternatives at the moment.
And as such our game plan is pretty clear then I think the second round of questions comes later in 2022.
Which as you know we gained traction in building out performance.
And can we get our outperformance in the midterm. That's the second round of question, but at this stage.
A couple of areas, where we're exploring strategic alternatives and other markets.
We're focused on building out performance and I feel pretty good about the plans that we have in place at the moment I think we will be ready to hit the ground running and three weeks from now.
Okay, perfect and just my other question was on the auto side.
Can you talk about.
The telematics data that you've got kind of relative to pre pandemic levels on what it looked like in Q1, and then what you've seen so far in Q2.
Yes, you said that you want to share a bit of color on telematics observation.
Yes so.
As we saw in 2020 in the fall, we said driver driving that does return progressively.
The economies, we're reopening but entering into 2021 and with the second and third wave of the government for it.
<unk>, we saw some some variation across the regions, but what we observed in Q1 2021 was that the driving reduced.
On a little bit again, but net to the extent that we saw on the spring 2020 and for sure.
So that's why as a result, we decided to announce then you relief program.
In March so as we are today, we're still seeing driving being below historical levels.
But.
That said net to the extent that we said when the crisis started in April 2020.
Jeff you are in the low teens range.
As of this week, if you look at this week for assist pre pandemic you know you're in the 13 ish sort of range less driving than pre pandemic.
Nowhere near the levels, we saw in the spring of 2020.
Got it great. Thank you.
Your next question comes from Brian Meredith from UBS.
Yeah. Thanks.
Couple of questions here for you I'm, just curious a lot of discussion.
This quarter.
On the U S with respect to pricing in commercial lines and just the level of rates decelerate and also some lines of business approaching rate adequacy I'm. Just curious you didn't change your outlook with respect to commercial lines.
In your commentary.
You can give a little color on what Youre seeing whats your expectations are are we getting some rate adequacy in some lines and until we see that rate to start to moderate some.
Yes.
Darren do you want to take first crack at that question and then I'll provide additional color.
Absolutely. Thanks for the question Brian.
When we look at Al Q1, right, another very very strong quarter.
Very much consistent with prior quarters.
Our rate increase in Q1 came in at eight 7% to be precise now.
Now, we know accident portfolio, which is which is pretty competitive given the profitable performance of that portfolio.
So ex accident, we're pushing close to 11% in the quarter. So really really strong momentum now obviously within that 11% is quite a range as you can imagine.
But in fact.
Eight of our 11 business units were up sequentially quarter on quarter.
And six of them are at all time cycle highs.
So really really strong momentum.
Across many many of those different lines with hard market environment, you can think about the auto environment protein D&O.
Excess property marine umbrella.
All of those are in clear clean hard market.
Conditions with rates.
Close to mid teens.
So we don't see any.
Change in momentum.
And obviously as you could expect those rates are well in excess of our loss cost trends. So.
We very much like the market conditions that we see right now in the U S and we don't see any sign at this point.
Of any slowdown.
Brian.
And to your question we track.
Pricing adequacy.
At very high frequency and in fact, that's one of the core governance elements of how we run the business everybody needs to stand on their own when it comes to price adequacy on when we don't have price adequacy, we pressed the brake pedal. We just don't go along with the market dance. That's why there is some dislocation in growth amongst the business.
Units my view today.
Is that.
The vast majority of the book is at or above our adequacy. So no no concern there in the lines of business, we're trying to improve.
Three of them.
Are also writing new business at adequate prices and beyond.
My observation on on momentum and trajectory would say.
That.
The rate increases as Darren just mentioned.
Our very healthy there.
They are above inflation.
Market remains tight, but if you take a two year perspective, when we talk in terms of derivatives. The second derivative here, which is the acceleration in rate change Bill.
Built up from early 19 right until December.
December ish 2020.
And now it's flattened so the second derivative is as reduced but the rate increases have not they were actually flat then and.
Flat in the sort of 10 ish range.
Healthy and the market is I think pretty tight.
So you know good environment for us to grow I think the run rate of the U S business is.
It was very healthy and safe.
Same thing on this side of the border as well.
Great. Thank you and then second question.
Curious on the personal auto book on frequency, obviously remains very very favorable you can see that in your results as you look out here over the next let's call it 12 months.
What are your kind of views with respect to claims severity trends, particularly the physical damage side.
Given potential labor cost increases.
Commodity prices up those types of things and how do you factor that into your pricing algorithms.
Why don't I take true overseas claims and as the best pulse on inflation for first start his perspective on inflation and then we will ask is that Ben to give us a perspective of how she is thinking about that in relationship with our pricing strategy. So I think why don't you kick it off.
Sure. So on auto in the claims cost we haven't observed a.
Acceleration of inflation, even recent months. However, it is a sustained pressure.
We've talked about over the fast for five years, that's coming from.
More technology in cars that creates an inflation in the cost of parts and it makes the repair process.
More complex to two to.
To perform.
That's what's central to our action plans and pricing risk selection and claims over the past three years. So we have.
On a good view on that is right. It is when you look at our total PD. So the replacement of cars and the repair of cars.
Theres, a yearly our annual inflation rate and severity in the mid single digit range.
That's we've seen and but that is not nothing new it's been sustained over the past few years and we have a good site on it we're very close between the claims and pricing theme or is about to identify these trends and are reflected in the pricing.
I think the other point I would add Brian before we ask because I've been to share her perspective on pricing.
Is the area, where there's been some inflation over the past six seven years is on the liability side of things and you've seen us starting in 2016, taking bold actions.
From the pricing risk selection claims supply chain management.
To obtain that trend, which I think we've had but this has been a pressure point in and as we look at the current COVID-19 environment on.
Long tail lines in other words lines that are subject to.
Liability exposure and.
Excellent benefit exposure we've taken on.
We're really cautious stance.
In reflecting the impact of reduced driving.
To ensure that it doesn't come on with meaningful increases in severity for.
Various reasons, we're not really observing that now.
But learning from the inflation on liability were taking a fairly cautious.
At this stage, let's talk about pricing you said that for a moment.
So on the pricing side.
I think mentioned, we're working very closely with the claims team and making sure that in our.
Overall price Debbie D assessment of our book, we reflect the projected trends, we think will have in terms of inflation and cost and thats exactly why in the past, we we've put some measure an action plan around around on our pricing.
Pricing to make sure we've covered those inflation. So as we are sitting today, we ask them for a darn right.
And momentum because of the temporary reduction in driving but as soon as we see that the level of driving is picking up.
Get back to our rating for TD and making sure that we.
Cover for the inflation.
Jay.
So the severity inflation, which we've observed for a number of years, Brian it's fully baked in in our rate position and our rate adequacy.
Temporary reflecting a drop in frequency, but we've done that in a way where.
Where are we can revert back to.
Our free COVID-19 rate levels.
Without too many obstacles.
As I was driving returns back to normal and I think our stance on severity has been has been quite cautious.
Great. Thank you.
Your next question comes from Tom Mackinnon from BMO capital markets.
<unk>.
Yes, thanks very much.
Good morning.
With me on the Super Bowl prior year development.
Just one quarter ago.
Add that although you held the 1% to 3% over the year.
Long run on.
You said the near term do you expect to be at the low end of the range and then one quarter later, you've reported some pretty good favorable prior year development.
How should we be thinking about what happened this quarter.
To what extent is it.
No.
Could it continue.
And it seems to me that.
Or are you, suggesting that.
Maybe running more at the mid point of that level on the long run as opposed to the low end of that level in the law on the long run.
And then how should we be thinking about favorable development with respect to the RSA book of business as well.
Thanks.
I think very good observation, Tom and I think we pointed out we pointed to the bottom end of the range last year in relationship with the fact that with a lower interest rate environment your provision for adverse deviation.
As you know as a result reflective of that and as such in a low interest rate environment, you should expect to be at the lower end of the range now.
All sorts of conditions can drive where you sit in the range I'll give louie musket may be unfortunate to share his perspective on P widely going forward sure.
Sure. Thanks, Charles So firstly.
We know that Q1 is typically a bit more volatile than other quarters, because it is very close to the prior year. So there's not much time between the prior year and the actual quarter two we lapsed into absorbed the changes that is typical in this Q1, we identified I would say three factors that led to a stronger <unk>.
Firstly, we saw that prior year cats develop more favorably than we anticipated so that impacted favorably. The generally speaking day lower claims activity that we've observed I would say over the past year since the crisis started.
It is also a factor here is just that.
Having a lower claims volume has enabled a bit more.
Favorable development to gather steam now and then the last element was what I mentioned in my remarks. The pools have also had a positive impact in the personal auto. So those were I would say the three main drivers in Q1, we have maintained our guidance.
Our long term guidance to one to three and I have noted in my remarks that given the strength of the start of this year. Obviously for 2021, it's reasonable to assume that we may finish at the upper end of that.
Of course, we are a it's a COVID-19 environment there is uncertainty and we've been cautious in the reserving. So as time passes we're hopeful that that will have a.
Upward momentum on <unk>.
But we've had a couple of years, where it was tougher and before sort of.
Hinting towards a permanent shift in the expectations I think we're cautious here.
And we will see the quarters develop.
They come around here, but I think we're in a good stance here, both Canada and the U S.
And.
Well, we'll monitor as the quarters pass.
And so it's not that guide was for.
Alright.
If we can continue with that is that guide related to the RSA book as well.
Oh, no not at all sorry that my comments.
It does not relate to the RSA book.
And the expectation is fairly muted on on development.
On the <unk> on the RSA book itself.
So I think Tom on bottom line Q1 tends to add a bit more P y V than previous quarter sitting where we sit today looking at the environment in which we operate on the position we've taken on reserves. We think we'll be at the upper end of the range.
For a number of months for a number of quarter. That's the first point with regards to RSA.
We have a bottom up view.
You know of where their reserves stand and what full due upon closing is we'll make sure that these reserves are brought to a level that's consistent with the IFC conservatism.
I will I will say and so obviously.
Our work on that started.
A long time ago.
Because that's the first place we start.
And and we'll make adjustments as a result upon closing as a result, this should not really changed our view of our.
Ongoing you know they might be noise in the near term, but nothing major and this shouldn't change our long term guidance on py need because you know, we'll manage to claims ourselves and we'll make sure upon closing that our reserves are at a level that is consistent by line of business by province by country.
That are consistent with our standards on top of that for in the process of buying protection for the past so to make sure that we're not you know.
Held back in terms of generating outperformance because of the of the past so feel pretty good about where we are we will provide more cash.
Alrighty once we owned the business.
Okay. Thanks, very much and just are you spoke.
Positively about.
What youre seeing with respect to the U S commercial lines.
Yeah with respect to Canadian commercial lines.
We've had a.
I guess to what extent has any of this lockdown or economic downturn impacted the Canadian commercial business and.
What do you see in terms of.
I think youre talking upper single digit.
Premium growth in hard markets continuing.
Is this accelerating at all on what.
Change.
You know as we kind of moved out of Lockdowns here.
Yeah, I'll ask Darren to share his perspective on the market and I'll give you a bit of color in terms of the COVID-19 implications go ahead Darren.
Yes, Thanks, Tom.
I think as as we referenced in the remarks, obviously there was a.
On impact of our losses on a single contract in the quarter.
That was worth about five points from a gross standpoint, so our run rate.
He is more on the 10% range at the moment, that's very consistent with what we've seen.
In past quarters, as well, obviously ex <unk>.
When I look at the rate environment today, or even just the general market conditions today. It still is a very hot market.
Right momentum is continuing capacity remains very very tight.
We have not seen any for them as you underwriting capacity enter into the market. Obviously, we saw a bit leaves cash.
The last year, none of that has returns so the operating environment is very very consistent at the moment compared to I would say, where we were at at the start of the pandemic.
From a rate standpoint.
Very much still up a single digit obviously, we're being very protective in terms of vulnerable customers. Obviously as you can remember back in Q4 with Al relief program that we put in place for small business vulnerable customers.
Watching them very much protecting the renewals for those particular customers.
Because that's the right thing to do.
But outside of that.
Momentum very much continues very much varies obviously based on not only on on class of business, but also profitability of risk as well and in a level of rate execution at the desk level.
Is exceptionally strong right now.
In addition to obviously managing quality, which is as we've talked about in the past he's really critical during this market cycle as well too so on old Tom I would say, a very very favorable market conditions.
Which I would suspect will continue for a little bit here.
So I would say on the biggest difference between.
The environment in which we operate and the post pandemic environment.
As the lines of business, where there are gaps inadequacy that are subject to lock down at the moment.
There's not much rates activity going there.
Cause we feel you know this is this is not the right time to do that once.
We returned to normalcy, we will make sure that the segments that are most vulnerable.
No.
Rate increase will resume that's the main difference.
Okay. Thanks, Thanks, so much for that.
Okay.
Our next question comes from Omar Saad from Cormack Securities.
Thanks, I just wanted to revisit the distribution EBITDA in our revised guidance from.
10% last quarter to the mid to upper teens, maybe you could touch on what's changed over the course of the past quarter to drive this increased optimism and then secondly, I think I heard Louis mentioned that RSA wont add to distribution EBITDA until 2022, maybe you can explain why that's the case. Thanks.
Sure. Thanks for the question.
So on the growth.
On the growth here. So we have to keep in mind that we're comparing Q1. This year to Q1 last year, which was the start of the pandemic and I would say you would expect all the brokers to hold back on their expectations for <unk>.
Variable commissions, so that was true last year in Q1, given the uncertainty we're now far into the year into the crisis things have stabilized and Youll remember for the second half for the last year. The business was growing at a very healthy pace and of course, the brokers, we're benefiting from increased margins in variable commissions.
So the GAAP year over year is really driven by a different view.
We're today in a much better position and the confidence in earning the variable commissions is higher and therefore flow through the earnings. So it's a combination of additional organic growth from last year impacting the Q1 results. This year and then the additional earning.
Earnings so when we look at that.
The solid start of Q1.
We look at what's left for the year the impact of our view of profitability for the year plus the organic growth has led us to increase the.
Our expectations our guidance for it towards the mid to upper teens. This year. So that's really what changed in our mind then the.
Second part of the question for RSA. So we don't expect a huge change to distribution income and I'm careful there might be a bit more distribution income, but it is not incremental to what is already reported by RSC. It might just shift geography.
Because they don't have any distribution line in their reports so it will come in our distribution, but may come out of another line. So it's neutral where we do see some some clear upside.
For example, as in the onsite business, which we expect to see.
Served more customers.
Going forward.
On site operations, but that does not.
I would say not going to happen until next year. So the benefits will start kicking in in 2022, you won't see a lot of it in 2021 that was really the way I pointed to 2022.
Okay. Thanks, and then just another question just on the relief programs.
Assume that the remainder of the unearned relief from the 2020 programs.
Come through similar to what we saw in Q1 so.
We'll see some come through Q2 smaller amount in Q3, and then we're done heading into Q4 is that the right way to think about it.
It is.
Okay. Thanks.
As long as you take what's left.
The big chunk of it is in Q2, I would say probably comparable to what we had in Q1 a bit lower but.
That's what happened in Q2 than Q3, a small portion in Q4 is almost nothing.
And to be clear the 70.
The 75 million was written and earned.
And bottom line in Q1.
Got it.
So you really have to go back to the 2020 other.
A portion of it was earned in Q1 and the remainder will be earned in the next few quarters, but the Quintin for 2021, New relief has already earned.
Okay. Thanks.
As a reminder to ask a question perhaps for star one your net.
Question comes from Mario Mendonca from TD Securities.
Good morning can you go.
Charles right back to that point.
<unk>.
Earned premium net earned premium Q1, 'twenty one relative to Q1 'twenty was down only about $46 million now I guess I would've expected a little more than that given the in quarter premium relief and then the other earned from previously from the previous year from the 2020.
You help me sort of reconcile the difference is the difference just essentially.
Other pricing increases growth in units.
But guess what bridges the gap between loved it.
You said that you want to do you want to take this it is it is in fact the units earned.
Earned rates and and a bit of a drift in other words increase in the value of the carpool, but.
Do you want to give some color on that.
Yeah sure so you're exactly right.
It's in combination of yes net earned premium in 2021 are a bit impacted by relief, but we're still getting momentum from the past rate increases we had in the pipeline early in 2020 that are hiring throughout the year. So that's creating momentum plus unit growth and also.
So increase in value update on new cars. For example, so that's also a positive impact on earnings.
So that's why overall the overall going back is net.
It's not that different or that big.
In terms of comparing 2021 for 2020.
Okay. So looking for things in perspective Mario.
The increase in the value of the car pool in the quarter aren't is one 8%.
And the average rate change earned in the quarter is two 9% might not be 100%.
But I think it's as precise as you'll get it.
On these calls and then you chose some units on top of that Okay. I think that gets me there. So looking at next quarter. The four 5% decline. We saw net earned premium in Q1, presumably it should be a little less than that because.
You've essentially recognized most of that in the quarter or the one month really.
That's a fair statement it should be a lot less than a full point, but yes, yes, yes.
So let me just get to my final question, then and this is one that I've kind of been struggling with.
When this all came down with the pandemic in Q2 2020, just clearly just simply looking at.
Underlying claims so ignoring anything to do with prior year development in anything to do with cash that we're a lot.
I noticed is that the year over year. The underlying claims declined substantially in Q2 2020, a little bit in Q3, and this is all on a year over year basis and the underlying claims remained low so it's exactly what you've highlighted that we haven't seen a return.
What is confusing to me. However is you talk about driving being down I think at one point you talked about maybe 30%, 40% this quarter maybe 13%.
Not seeing that kind of a decline in claims.
So I imagine very much like my first question Theres a lot more going on here can you help me understand then why the actual underlying claims are not dropping as much as say driving is dropping.
Well, there's a number of factors Mario and one would be the relief.
That we have provided which obviously is reflected in the underlying loss ratio I think.
The other one Mario is that the sudden drop meaningful drop in frequency.
Was.
Really just in Q2 and then it increased from their third for a long tail lines Mario as I mentioned in Brian's earlier question, we're taking a fairly cautious stance in terms of what we'll see because we think there might be upward pressure on severity and as a.
So we've reflected that in how we've reserved the current accident. The accident years 2020 in 2021, and therefore that will paint a portion.
On the reduced driving that you would see an accident that I would say these are.
High level. The main factors that would explain why why youre not seeing.
Such such a drop and really being a big ticket item in that equation, you said that.
Any additional color you want to provide there.
I assume are you you were looking at underlying loss ratio is right now in fact I was talking about underlying claims ignoring anything to do with ratios just the dollar amount.
I wanted to see if that track some of the some other commentary you are offering so I'm not talking about the ratio.
Yeah, then I think go ahead.
No I would just maybe add that as well on their short tail lines, we saw a bit of an increase in severity due to that mix of claims as well since the day type of driving was different during the crisis. So I think that's also.
Something that influence net claim juicy.
Okay, I guess I think the answer is mostly severity and that's what I'm just trying to understand because it does sound like severity has changed because there is such a difference between just the basic change in underlying claims relative to the amount of driving we're seeing so I felt like there is something else happening here that I didn't understand that I think the answer.
It might be severity or you come up on them.
Yes.
But I think a key point Mario was the point I've made if you'd think about.
The losses in automobile insurance business.
Ballpark you know.
65 ish.
Bodily injury and liability.
And 35 ish, some would say 70 30, depending on the province in which you operate.
The risk so a third of it is.
As for repairing the cars.
What you are seeing the results and the impact of the drop in frequency is far more pronounced in short tail lines.
And it's far less pronounced.
In long tail lines.
And why because long tail lines are indeed long tail and as a result, we take a cautious stance until we see what severity will do.
Wouldn't conclude.
Other than the severity that <unk> talked about.
And theres plenty of inflation in the system at this stage I think more so we're being careful.
As we think about bodily injury and liability.
Yes, I think that goes a long way toward explaining the difference as well thank you for that.
Yeah.
That was our last question at this time I will turn the call back over to the presenters.
Thank you very much and maybe before closing I will turn it over to Charles just for a brief word on the recent leadership changes.
Yes, indeed, thanks a lot.
Can you have seen this week that we have announced the retirement of our materials on me.
Later on in fact that many of you.
I've met in the course of the investors day, and so on and you have seen at the same time that I'm not sure we'll be <unk>.
Ceded by taking about Bowl also a leader that you have seen and heard.
Every quarter for many years.
Let me first say that.
<unk> has been a pillar.
For intact.
On my key.
A key partner in our in building intact. He is respected across the organization.
Is he knows the business cold shrewd fast.
He defines what tends on actually has made a big difference for US met you will remain as vice chairman.
On a part time basis and will help us continue succeed in technology innovation as well as in security.
I think you've been exposed to as <unk>.
Well, a tremendous leader very well respected in the organization also noticed the business cold.
As overseen in fact done a lot of pricing himself overseen personal lines overseen claims.
Drove a big portion of the claims strategy.
And as been exposed to both distribution channels used to oversee marketing and the direct channel and I'm very confident in that takes the ability to step up so I wanted to congratulate Matt sheerin. Thank him for quite an impact he has had on the organization.
And I congratulate that take on his new role.
<unk>.
On that thanks for that for your attention Ken I don't know if you want on.
Closed this yet.
Thanks Charles.
So on.
Following the call for a telephone replay will be available for one week and the webcast will be archived on our website for one year on.
Chris will also be available on the website and the financial reports on filing section.
Just to note, we will be hosting our virtual annual meeting of shareholders. Shortly after this call at one PM Eastern today and you may joined up meeting via live webcast from our website Lastly, second quarter of 2021 results are scheduled to be released after market close on Tuesday July 27.
So thank you again on this concludes today's call.
This concludes today's conference call. Thank you for participating you may now disconnect.
Just.
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