Q2 2021 Intact Financial Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to the impact Financial Corp, Q2, 2021 results conference call. At this time all lines are in a listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time during this call you'll require me to the system.
Please press Star zero for the operator also note that this call is being recorded on Wednesday July 28.2021.
And I would like to turn the conference over to Ken Anderson Executive Vice President Investor Relations and corporate development. Please go ahead Sir.
Thank you Tony Good morning, everyone and thank you all for joining the.
The call today.
To our live webcast and published information for this call is posted on our website is intact. After the dot com under the investors tab as usual before we start please refer to slide 2 for cautionary language regarding the use of forward looking statements, which form part of this morning's remarks.
On slide 3 for a note on the use of non <unk> financial measures and important notes on adjustments terms and definitions used in this presentation.
With me here in Montreal, and today, we have our CEO Charles Brenda Moore, our CFO do we Mark Cox, our Chief operating Officer, Patrick Barbeau is a boat.
Both Girard SVP of personal lines, and Darren Godfrey SVP of global specialty lines sorry.
Isabelle Girard EVP.
Of that on.
Personal lines will begin with prepared remarks, followed by Q&A with that I'll turn the call to Charles.
Thanks, Ken Good morning, everyone and thank you very much for joining us this morning.
Our communities have made great progress over the past few months.
And we're hopeful for a gradual return to normalcy as we emerge from the pandemic.
For us this means continuing to be there for our customers and helping our.
But that to a new work environment.
Assuring to see that.
On an important period of change and turbulence our business can not only be resilient, but also thrive and grow.
Clearly the successful acquisition of RSA is a good example of this.
Quite pleased with the progress.
We've made so far.
But in the meantime, our business is continuing to deliver strong performance yesterday evening, we announced second quarter net operating income per share of $3, 26% to 39% increase over Q2 last year, driven by strong underwriting and distribution.
People.
Top line growth up 29% was driven by the acquisition of RSC with.
With approximately 7 points of organic growth, reflecting strength in commercial lines on both sides of the border.
The overall combined ratio was 86, 7% driven by.
Strong performances across all lines and geographies.
In Canada, the combined ratio was excellent at 85% driven by strength in underlying performance. The combined ratio included 1 point from the tragic lift on fire.
Our claims team and on site business have mobilized.
Mobilized very quickly to help the community get through this difficult time.
Let's now look at our results by line of business, starting right here with Canada.
In personal auto premium grew 1% year over year, excluding the BC auto exit growth was 3% driven.
By units.
The combined ratio was very strong at 82, 4% our personal auto business is solid and we expect it to hit low <unk> for the remainder of the year.
Looking at the industry, we're seeing prudent rate tempering in the current environment and with driving activity just 5.
5 points below pre COVID-19 levels.
Could see rate momentum return over the next 12 months.
In personal property.
Premiums grew 5% driven by firm market conditions.
With a very strong combined ratio of 83.3 percentage.
Quarter, the business is performing extremely well.
Our operating track record in the past 5 years is a testament to the resilience of this business and.
In commercial lines premiums grew 12% driven by rate actions and solid organic growth, while delivering a strong 89, 6%.
Percent combined ratio.
Looking at the industry, we expect hard market conditions to continue.
In our commercial lines business is really well positioned to deliver low ninety's or better performance going forward.
Moving to our U S commercial business premiums grew a strong 19% in the quarter.
Quarter benefiting from increased activity on Covid impacted lines versus 2020.
Adjusting for this.
The underlying growth in Q2 is in the low double digit range supported by the continued hard market conditions.
The combined.
93% was solid as the team continues to execute on the objective to deliver sustainable low.
Low ninety's performance.
Turning to our RSA acquisition, a lot has happened since we closed 7 weeks ago.
People are largely on boarded with their.
The ratio of teams and locations confirmed.
Customers in Canada will start to move to our product and systems next week, a number of technology investments decisions have been made and are rolling.
Action plans are in place across all segments to drive outperformance.
And we acted quickly to rationalize.
The footprint with the sale of Denmark. So.
So it's fair to say that there is momentum.
Now, let me provide a bit more color on Canada specialty lines and the UK ni parts of the integration as well as transition.
In Canada, the integration is going really well we're advert.
<unk> on systems convergence with the first policy renewal renewal on intact paper to be issued in August, allowing us to leverage our core capabilities in data.
Pricing and segmentation.
We're building capacity to drive the internalization of <unk> claims operation.
We're starting to leverage.
Leverage our supply chain management expertise as well.
This includes engaging our on side restoration business to handle a large portion of RSA its claims since close.
The Canadian integration is definitely on track, it's T as disk drives 3 quarters of the synergies.
Yes.
Moving to global specialty lines, the North American portfolio is being integrated as we speak with Paul Lucarelli, originally from RSA, leading the charge.
We're bringing the global network into the fold, which allows us to expand our reach and were working across our geographies to better understand.
Our core specialty lines capabilities as we prepared to build our international franchise.
We see the expanded specialty lines platform as 1 of our key growth engines for the next decade.
Moving to the UK ni.
Following the close a few members of difc team on.
And I spent 3 weeks in the U K engaging with Scott and the RSA team and together we are aligned on the main areas that we need to sell.
To build outperformance people.
Simplifying the business improving pricing sophistication and modernizing technology first on people.
Scott has put together an excellent team and we are delighted to be working with them to continue their journey towards building an outperformance machine.
Together, we have set midterm strategic objectives for the business and we've had the unfortunate teeth to share our values and the importance of an outperformance mindset.
We're also supporting the team as they simplify the business.
By focusing the footprint streamlining the offering and technology infrastructure. The operations will build a robust foundation for outperformance that.
That in my view can deliver a second to non customer experience.
We also have a number.
<unk> of experts working closely with the UK team to share our expertise and pricing risk selection machine learning as well as claims management overall in the UK and I am pleased with the progress so far the RSA team has done tremendous work over the past couple of years and are already delivering solid performance.
<unk> and we have great momentum and people are engaged.
We've talked about focusing the footprint and we move quickly right. After the close to announce the sale of the Denmark business, which is expected to complete in the first half of 2022.
The sale will generate over.
Over 1.2 billion in proceeds to intact, which lifts our IRR expectations by at least 1.5 points for the RSC acquisition.
While we're integrating RSC our teams haven't missed the beat in executing on our customer driven strategies.
On the digital front.
We're continually adding new feature on our mobile app to create value for our customers driving engagement throughout their journey with intact.
We added roadside assistance to provide enhanced protection for our customers and our recently launched claims chatbot now handles.
With 90% of the digital chats with our customers. Our distribution channels are also delivering on our customer driven promise broker link is now running over $2.3 billion of premiums annually an increase of over 25%.
2019.
And with a robust.
About how many pipeline, we think that Joe D'annunzio and team can double that business over the next 5 years.
There is a lot going on and the business is firing on all cylinders.
Over the last year, we've made very good progress on all fronts throughout the pandemic, we've lived our values in Denver on our purpose.
Purpose to help people businesses and society price.
Per in good times and be resilient in bad times.
We've also transformed our business with the addition of RSC.
All the while continuing to deliver second to non customer experiences. This would not be possible with what else are people I don't want to thank.
On them for their continued drive focus on energy.
We've added an impressive amount of talent and expertise through the <unk> acquisition and I want to welcome everyone to the intact family.
Our business has a lot of momentum our balance sheet is very strong we have a clear focus on what we need to.
To achieve and I'm more confident than ever in our ability to deliver on our promise to customers meet our financial objectives of 10% <unk> growth annually over time.
And 500 basis points of ROE outperformance every year and with that I'll turn the call over to our CFO, we must cut.
Thanks, Charles and good morning, everyone.
After 6 months of planning together on June 1 we closed the RSA transaction and welcomed Rbcs Canadian UK and international employees to the impact family.
Financially not only has the deal immediately accretive to net operating income per share. It also brings increased resilience to our balance sheet.
Strategically it expands our leadership position in Canada, bolsters, our specialty lines capabilities and opens up new markets in the UK and Ireland at scale.
I will provide some more color on the financial impacts from RSA shortly but first let me make a few comments on our strong second quarter results.
Net operating income to common shareholders.
By 49% year over year with all earnings sources contributing to this growth on the.
Alrighty income grew 63% compared to last year to $464 million as strong underlying performances across the business continued reflecting the benefits of our actions over time mild weather conditions and the strength of ours.
Net investment income of $154 million increased by 9% year over year.
For the full year, we still expect net investment income to be flat before including the impact of RSC, which will add roughly $100 million to 2021 net investment income, including the $13 million recorded in.
In the month of June.
Distribution EBITDA and other income grew an impressive 51% in the quarter driven by better than expected variable commissions as well as solid organic and M&A growth.
We expect growth in the second half of the year to taper towards a 10% to 12% range as we compare against.
Strong second half of 2020.
Although RSA was included in our results for 1 month only it added $57 million of underwriting income and $13 million of investment income to our operating earnings after reflecting financing costs and dilution from the shares issued the net operating income per share accretion is high.
<unk> for the month of June we expect to maintain a similar level for the second half of the year.
Looking at underwriting results in a little more detail healthy favorable prior year development contributed to our strong results in the quarter and year to date, we have been and continue to be prudent and establishing current year.
High single barriers, particularly considering uncertainties related to COVID-19.
We maintain our longer term expectation that favorable <unk> will be in the range of 1% to 3% of reserves annually for the impact group in aggregates.
Depending on how and when the uncertainties unwind, we expect to see favorable.
Year reserve element in the upper half of the range in the shorter term.
In personal auto the underlying loss ratio of 59, 6% was strong despite the impact of premium relief and reflects our actions over time.
Relief program launched in March and March is now closed and we returned an initial additional.
Over $30 million to customers in Q2, bringing the total program in $2000.21 million to $105 million.
Looking at commercial lines in Canada, the underlying loss ratio of 51, 3% is the best performance. We have delivered to date in the U S. The underlying loss ratio of 51.
<unk>, 6% was strong driven by corrective underwriting and profitability actions as well as rate gains across the book.
Momentum in commercial lines is strong on both sides of the border and well positioned for low <unk> or better performance overtime.
On expenses, the overall Canadian expense ratio of 32, 9%.
<unk> for the first half of the year increased 2.2 points over last year. This was driven by higher variable commissions consistent with the strong underwriting performance in the first half of the year.
The combined ratio of 97% for RSA in June was solid driven by underwriting performances in both Canada and the UK ni.
So these results are also largely the result of lower frequency mild weather and profitability actions offset by elevated cat losses in Canada.
Although 1 should not assume that results for June are indicative of full year results. We are pleased with the results. So far and are increasingly confident in our ability to deliver the earnings accretion we promised.
We are entering the second half of the year on solid footing, while closely monitoring driving habits as people progressively go back to their offices as well as cat activity.
In terms of RSA as underwriting results for the second half of the year. We believe the best starting point on top line is to use half of the premiums.
Of 2020 as reported in their annual report for both Canada and the UK Ni.
The combined ratio was difficult to predict of course, but we would use the 2019 as the base year to exclude the impact of Covid in 2020.
Both Canada and U K and I reported combined ratio was in the mid 19.
<unk> range.
If you shave a point or 2 for product profitability improvements already achieved and add a bit of synergies you have a good idea where rsa's underwriting results should land in the second half of the year.
Keep in mind, it's important to anchor any expectations with our accretion estimates.
<unk> 19 to further Derisk the acquisition, we entered into a transaction with a reputable reinsurer subject to specific exclusions and limitations. This agreement provides us with a recovery of 50% of adverse development up to 400 million pounds on the UK Ni claims liabilities for 2020 and prior accident years.
The net cost of the.
This reinsurance will be recorded in Q3.2021.
With the addition of RSA. It is also appropriate to revise our annual estimates for cats, which reflect a long term view of trends, we are raising our annual cap expectation from 300 million to $570 million.
Others per year to reflect the growing premium base and change in business mix.
Now expect 2 thirds to impact person alliance and continue to expect 1 third of the annual cats to occur in each of Q2 and Q3.
Having said that 1 month into Q3, we have experienced a couple of weather.
That's both in Canada, and in the UK, which will translate into cat losses for the third quarter.
As of today based on early estimates these losses are within our revised GAAP guidance.
On synergies we are on track to realize the stated $250 million and run rate synergies within 36 months.
Largely generated from claims internalization and consolidation of shared services.
We continue to expect integration and restructuring costs for the transaction to run at 1.5 to 1.7 times the annual run rate synergies.
In the second quarter, we recorded approximately $35.35 million of these costs and we expect to incur high.
Half the cost by the end of 2021.
The remainder will be recorded progressively over 2022 and 2023. These costs are reported as non operating results and do not include the net cost of the adverse development cover.
Moving to our balance sheet on closing of the acquisition, we recorded the acquired assets and liabilities.
Of RSA at fair value together with the associated transaction financing.
With our strong performance in the quarter. This took our book value per share to <unk> $70.77.67 on June 30, an increase of 44% compared to Q2 last year and up 25% compared to last quarter.
Our operating ROE increased to.
1.8% in the 12 months to June 30th for full year 2021, and going forward. We are aiming to work we are aiming for a mid teens operating ROE level in line with our historical average.
Our financial position continues to be strong we closed the quarter, having incorporated the RSC acquisition with approximately $2.6 billion in total.
Total capital margin, a healthy buffer to absorb potential shocks.
On a debt to total capital.
Our debt to total capital was just above 24% at the end of the quarter better than we projected thanks to the strength in our book value deals.
Deleveraging will accelerate in 2022, as we expect to use most of the proceeds.
<unk> from the sale of Denmark, assuming it closes to reduce our debt and reach our 20% target earlier than planned.
With the acquisition closed on integration and synergy realization underway. We are on track to generate high single digit accretion to net operating income per share in the first 12 months moving to upper teens within 36.
<unk>.
We produced an excellent set of results for the first half of the year, while accelerating our strategic roadmap. Our focus is now on capitalizing upon the momentum across the business, while delivering on our strategic and financial merits of the RSC transaction.
With the strength of our teams and our platform, we are well positioned to deliver on our.
6 months on objectives in the years ahead.
Before giving it back to Ken I will take a second here to thank our teams in finance actuarial legal and IR on both sides of the Atlantic for their significant effort over the past months to produce quality financial information for investors on the timely basis I am very proud of what the.
Teams have achieved and I want to thank them for their contribution.
With that I'll give it back to Ken.
Thanks, Louie in order to give everyone a chance to participate in the Q&A. We would ask that you kindly limit yourselves to 2 questions per person of course, if there's time at the end you can certainly re queue for follow ups.
We're.
Financial take questions now certainly ladies and gentlemen, if you do have a question at this time. Please press star followed by 1 on you touched on something you will then hear a sweet home prompt acknowledging your request and if you would like to withdraw your question simply press Star followed by 2 and if you're using a speaker phone. We do ask that you. Please lithium.
Registered before pressing any keys. Please go ahead on press Star 1 now if you have a question.
And your first question will be from Geoff Kwan with RBC capital markets. Please go ahead.
Hi, good morning, Mike.
My first question was on personal auto.
I think you've talked in the past a book.
Potential for premium increases when driving returns to more normal levels, but I was curious around how much to combined ratio may also influence the timing of any sort of premium increases. So for example, like if we get driving back to normal.
That presumably from a timing perspective.
<unk> ratio is probably.
Probably going to increase in a reasonable amount of time, but what if we have a scenario where.
Driving is back to normal, but the combined ratio remains better than before do you worry about any sort of potential optics.
For the industry.
From consumers around increasing premiums.
If traffic is back to normal on the combined ratios remain better than.
The usual.
Jeff Good morning, Thanks for the question I am not worried about that this market is super competitive it's always been very competitive.
The industry average has been a single digit Roe.
Business and catching up with cost.
In a highly.
The competitive environment.
On a challenge for the industry.
That's why our performance is the name of the game in that business and that's why we built a big outperformance margin.
In automobile insurance from my perspective.
The industry entered into the.
Is this with a meaningful amount of work left to be done to deal with the things that we were focused on since 2016 think about inflation on the liability side of things inflation and physical damage. We put much of that work behind us I don't think thats. The case at the industry level, you don't need to go back.
Cried too far to see that the industry even in.
2020 and adverse development.
And still poor results in the first and the first half so I'm not really worried about that I think the industry is its quite competitive I think.
What people should be.
<unk>.
Focused on in my mind is to make sure that prices are adequate when when driving returns to normal taking into account the pressure that existed in the system before COVID-19. So.
Not worried about that Jeff 1 bit and I feel like we're really well positioned with the work we've done.
Done on relief.
Our pricing position on the flexibility we've covered to react.
When the time comes.
Okay and just my second question was with respect to the RSA acquisition for the non Canadian.
On businesses.
You acquired I know I think you've talked about evaluating.
<unk> them over the next year, but have you are you able to say whether or not there's been any third parties that have approached you with interest about some or all of those assets.
Well clearly when there is a transaction of that nature.
Yeah.
First of all.
Many people were surprised.
<unk> by the transaction, yes, you'll get inbound calls from time to time I think that we said very clearly at the start of this transaction that we would evaluate our strategic options for Denmark, We did and we acted on on the inbound that we've received.
A couple of weeks after closing.
As far as the rest of the platform is concerned we're really focused on building outperformance here and making sure that.
We're being rewarded for the risk and the capital that's being deployed clearly the U K is the biggest part of this and.
We're focused on building out performance there and there is good traction we have a very good team.
Okay. Thank you.
Did you have any further questions.
Yes that was it.
Yeah.
Thank you Mr. Cohen next question will be from Paul Holden CIBC. Please go ahead.
Thank you and good morning.
My first question also relates to personal auto.
Charles You gave you gave an outlook for the remainder of the year, but it's a little bit different than what we've seen from some of the U.
U S auto insurers, where they've sort of seen a spike in.
Claims are accident frequency related to.
Returned activity and then also have called out.
And acceleration in severity so.
Wondering how your outlook is different than.
The U S insurers and maybe specifically drill down a little bit more on what youre seeing on the severity trends today.
Good well good morning, Paul Thanks for your question, obviously, if you compare frequency in Q2.2021 with frequency in Q2.2020, you will see an increase it's obvious the state of the world was very.
Very different a year ago than you see now so I think that 1 needs to look past.
What happened Q2 over Q2.
And look at where driving is going and then look at where inflation is going and so what I'm thinking Paul maybe we start with is that bell, who will give us her perspective.
We are seeing in terms of activity and then Patrick will take us through what we're seeing on the severity on inflation side of things. So we can have better why don't you.
Take this.
Yes, so in terms of driving what we see.
With the latest waves of Covid in 2021, and we saw some reduced driving into spring 2020.
On what you were mentioning Chow net thing to the extent, we sell index spring of last year in 2020.
We're in full Lockdown, I think said that driving activities on the horizon early Mi and we announced the thing about <unk> 5 points below the pre COVID-19 levels.
<unk>.
So as as vaccination continue to progress we expect that to driving we also continue to rise.
Being weak.
I didn't say that.
King at the average of driving we can think that we're close to non mall, but normality, maybe a bit different in the coming months.
1 we've been looking closely at the various data coming from our day domestics and while number of miles driven is 1 factor that changed with the pandemic Theres also other assets that that change or when people are driving when and where people are driving and our people are driving are examples of things.
So with that we start on <unk>.
And during the pandemic.
So.
2 examples of that thing that we have started is that our net net back to normal yet.
Russia, whereas in congestion are an example of things that when we look at the weekend. So we're pretty much at historical levels, but when we're looking on the weekdays.
<unk>, especially for the rush hour morning, and we see that we're still below.
A record level and were also observed that's driving have been recovering faster than public transit usage and in the last few weeks, we have seen public transit picking up so those are exempt.
As far as things that we're continuing to follow and we believe with our data would be ready to quickly identify any new trends that may last.
Then we can adapt our pricing occurring thanks.
I bet I think maybe we can talk about inflation a little bit.
And on.
Total.
So the main driver of inflation on severity continues to be the technology in cars that increases the cost of parts on the complexity of the repair process, but this is not something new in our view, we've been talking about it for a while it's central to our action plan, 2 or 3 years ago and it continues to put.
Pressure on on severity.
It is important dimension that we can quickly reflect the strength in our pricing.
Our price.
Specific to each make model and year, so as new models come out in the market leverage our claims data to price that complexity in the parts and repair process even.
I would say the claims experience actually shows it.
We supported that with our actions in claims and supply chain to allow us to mitigate that trend over the past couple of years.
So overall, we've seen mid single digit increase in repair costs over the past year.
With.
<unk> to maybe the price of new cars and the inflation of used cars.
It is there, but again here on pricing can I, just very quickly on the new guard as well as.
Representing.
Depreciation patterns, if you want an older model years.
Maybe my last comment.
Before his overall in Q2, when we look at both our experience here in Canada and in the UK. The total losses, which is where we settled the claims based on market value instead of repairing the car has seen low single digit inflation rate so about half what we see in the cost of repair.
Thanks, a lot.
Yes, so we try to make sure that you know.
What we are reading the newspaper is not what we talked about in the earnings calls we have a fair bit of granularity here I'll say, there's a lot of moving pieces at the moment and that's the sort of environment that we love because the pricing strategy that we have a super.
<unk>.
Focused.
And segmented to take into account behaviors and on the inflation front I think Patrick and team have done a fair bit to tame some of that inflation over the past few years and a big chunk of it as reflected on our pricing thought process and the last point I'll make is that.
There is flexibility at the moment in terms of our ability to react and I think the team is on top of that.
Got it Okay and then my second question is related to the revised.
Cat loss guidance.
Are you able to unpack how much of that is related to the.
Say acquisition and how much of it is related to.
Increase in expected claims trends.
Yes, Paul.
Not much in terms of increase expected trend I think it's the makeup of the business at this stage, but I'll, let <unk> give you a bit of color on that.
Well I think that's the answer it's mostly RSA driven.
So you are taking into account the Canadian edition of the Canadian exposures into our Canadian expectations and then the addition of the UK parameter as well with maybe a slightly different business mix. When you combine that this is what drove the increase we should we choose a day so it's.
<unk> are largely the <unk> impact.
In fact that we took into account.
And if I can ask just a quick follow on on up on that answer then is the mix also different within RSA, Canada. It looks like there's a little bit more cat exposure within their book versus intact legacy book does that is that accurate.
Much no I would say when we referred to the change in the mix, it's more adding the UK volume that's more hasn't been a week on properties are forecasted at a bit more than its share from a volume perspective, but the books in Canada.
Have a big difference.
Sweet proportionately.
Okay got.
Thank you.
Thank you next question will be from Doug Young at Desjardins Capital markets. Please go ahead.
Hi, good morning.
As stated in the release that there is regulatory reforms coming in the UK that could result in some volatility on opportunities for assays personal lines business.
And I think Thats early next year. So I just wanted to delve a little bit into that more specifically, what do you mean by volatility and opportunities.
Well good morning, Doug and you're right. These reforms.
<unk>.
[noise] reforms that will take.
Got it largely at the end of the year.
Therefore early January.
They are driven by the FCA, so market conduct regulator in the.
In the U K, let me give you a bit of context to understand what the intention is there and then maybe share.
Sure My view on on what it means for the marketplace and this will help answer.
Opportunity and volatility are the words that you are interested in.
If you look at the UK personal lines market because this is largely about personal lines.
We've seen message massive shifts.
In distribution over the past couple of decades, it's really driven the market to be.
Price on lead type market.
And as a result, you see that customer retention or loyalty is much lower than what we're observing in.
Other markets and certainly here.
<unk>.
In Canada.
<unk>.
And there is a lot of pressure to attract new customers at low prices and so when you put all that together over time.
A meaningful disconnect thats been created between new customer pricing and existing customers pricing.
Which in effect.
Penalizes loyalty, so obviously, that's a problem and and the FCA reforms, while on a few pieces.
That is the big issue in my mind.
It really aimed at restoring a better balance between new business and renewal price.
We think it makes sense actually and we support the intent.
The regulator there is debate as to how the rules will be applied and so on as there always is but we think the intent is a good 1.
So what it means for the market what it means for us the reforms really are focused on home and.
Pricing.
We think that because there is a meaningful difference in market practices between new business and renewal that in January youll see significant price dislocation.
And new business pricing is likely to go up somewhat materially in my.
Auto while renewal pricing.
<unk> will go down the net effect of these changes is yet unclear, it's a very competitive marketplace and we will take a prudent approach as we approach this change.
But dislocation we think is an unfortunate T to grow.
My mind rich lines portfolio and take advantage of that to improve price sophistication. So the teams in the UK are totally focused in my mind and we spent a fair bit of time on that Doug when we were in the UK a few weeks back.
The team will be ready and we're using disproportionate.
Fortunate to lend Canadian pricing experts to support the good work of our teams in the UK.
What we really like about the UK personal lines market is the fact that there is tremendous flexibility to modify prices and leverage pricing sophistication very quickly in fact much greater.
Low ARPA.
Then what you can see in most provinces here in Canada, So clearly.
Our planned Douglas to intent is to really.
Use all that flexibility to deploy.
The best Science and predictive analytics. So overall I think the reform is.
Greater positive 1 for the UK personal lines market in the long run in the near term it'll be windy there'll be a fair bit of dislocation, but again lots of moving pieces, we like that and I think the team is ready for that in the U K.
And just so basically what im getting.
That too is like when I hear you talked about dislocation, which I've heard you talk about many times I always think of M&A and that's really not kind of that focus here.
When you think of dislocation on opportunity M&A its more taken advantage of a change in the marketplace the better your business essentially yes.
Yes, I think thats right.
Doug.
<unk>.
M&A it depends on the extent of the dislocation in the market, but our comments were.
Far more geared towards <unk>.
D&A out.
Market activity.
And then second just on the prior year reserve developments in another quarter.
<unk> results, there and you kind of how your ups and downs over the last few years it feels like.
Adjusted down your your guidance in the past.
Are we heading into another level here and can you talk a bit about some of the drivers and what youre expecting in terms of contribution from RSA on on the reserve development side.
Yes sure.
I think.
Doug.
It has not been the same number every quarter I'll say this there's no doubt about that when you say up and down.
It vary over time, but if you look at the track record and if you look at every.
Sure it's positive pretty much all the time, so I think I want to make sure that this is clear when we look at our historical track record.
Structurally speaking.
Lower interest rate environment.
Lead to a lower expectation of prior year development I.
3 year its 1 key element that drove the guidance, we've provided between 1% and 3% over time. There is a number of moving pieces, we're being cautious maybe I'll, let Patrick give you his perspective on on <unk> and aggregate.
And then we'll see if it covers the elements of.
Sure.
Yes, Charles was.
Introducing.
The lower levels.
Interest rate over the past 2 years.
To provide guidance in the 1% to 3% range for favorable <unk> on the other ending over to Pat.
To your question.
Few years with the pressure.
Inflation pressure in auto and more recently.
The additional uncertainty around claims and to be.
Specific here, we're talking the indirect effect of Covid related claims.
On the long tail lines.
It took a very prudent approach and the reserving in that context.
So in the short term this might create a little more volatility.
On the <unk>, but are cautious approach on these aspects give us a very good likelihood in our view.
To be on the higher part of the range of $1.
With that and Thats, both total IFC, including the RSA book.
But probably we can expect Canada to be slightly above what we will see.
And the other parts of the book.
Q2 was largely an illustration of this.
What helped by a couple of large files.
3 per and the fact as well that in short tail lines, we always expect to see a bit more of that in the first half of the year than the second 1, but I would say largely aligned with.
Reflecting I guess that dynamic now the last thing I would say is we need to be careful not to totally isolate <unk> from the currency.
Because.
Reflecting additional risk in their reserves in the current accident year is what create potentially more favorable <unk> afterwards.
If and when the risk does not fully materialized yet.
I think it's a very good and an important point that take when I look at the underlying performance.
The.
As today I think in aggregate, we're not too far off from from what the underlying.
At the moment when <unk>.
On.
On the U K.
<unk> say, we spend a lot of time.
A number of us spend a lot of time on looking at these reserves over the past.
Our business for years, we're quite comfortable with where we are we strengthened the balance sheet at.
At closing, we bought an adverse development cover the idea here is not because we were uncomfortable with reserves, it's more with the fact that there is an unknown.
We're not.
From the UK, we havent been involved.
<unk> historically.
It's an organization that has a long history and therefore, there is some unknown and we felt that having an adverse development cover or similar to what we've done in the U S was good risk management practice as you enter.
New market, but we're comfortable with.
The position.
<unk>, we've taken in the UK and believe I've established a degree of caution that's very consistent with.
How we how we reserve in general obviously.
If you're new in the market you will take a more prudent approach over time.
And that will.
Will not be different this time around that's why our perspective is within the aggregate range I think set of 1% to 3 should be at the upper end and the Canadian business should should in the near term anyways.
Help us be at the upper end of that range.
I appreciate the color. Thank you.
Next question will be from Mario Mendonca at TD Securities. Please go ahead.
Good afternoon.
On my part probably probably best for you I'm I'm looking precisely at what Charles just referred to when he said that took a conservative look at the balance sheet on closing so I've been focusing on.
Note 4 of your financial statements and obviously I'm not going to go to rely on there's a lot of complexity here, but could you speak to.
The magnitude of the adjustments made to Rsa's claim liabilities from what you saw.
On the financial statements to what you arrived at the 11.6.
$11.7 billion of claims liabilities was there a meaningful increase in claims liabilities from what you saw on the financial statements to where youre at today.
So.
The word meaningful as maybe questionable here, but what we have done in the closing process was firstly.
<unk> remain our accounting practices between ourselves and the acquired balance sheet. So they weren't necessarily providing for the reserve the same where we were and we needed to have a consistent accounting policies and approaches across and that drives most of the adjustments we've done.
There were some areas, where we thought we should top up a bit which we have done and this is what I think Charles refers to as a strengthening.
But overall I would say.
Felt very comfortable in the U K perimeter with where they were and just.
Popped up a bit where we thought.
If it was needed and then in Canada aligning ourselves.
Between how we viewed the need for reserves.
Was aligned between the 2 those 2 countries so.
I won't quantify specifically the magnitude here, but there was strengthening and alignment needed to bring.
The balance sheet to the same standard designs and maybe Mario when I see.
If you look at some of the strengthening we've done.
Say 2 thirds of it is probably Canada. The bulk of it was excellent benefit driven in Ontario, Mario I think we've.
We've taken the street along over the past 3 or 4.
For years on the issues there, we've said that we felt that.
The industry was a bit late so we were very consistent with our observation.
With the RSA reserves and then a third.
In the U K market.
Focus on the longer tail lines of business.
Commercial liability just to make sure that we were on par with how we otherwise would've reserve.
Yes.
Inclination and sort of the nature of the question is not so much that I think the company wasn't conservative, but rather that the company has been.
<unk> been very conservative.
And so far as.
Like how this acquisition was accounted for but maybe more generally where I'm going on with this is that.
The <unk> in personal auto antibody generally has been good and we've talked about that a little bit on this call.
I understand that that's not unique to intact that the industry as a whole.
You have been somewhat conservative in setting up the IV and are in personal auto over the last little while but the nature of my question is this.
Can an industry experiencing this level of P y D.
Apply for pricing increases are those 2 things can you actually do those 2 things simultaneously.
Seems to me is the record big PID and apply for pricing increases at the same time.
So.
You can and so I think Mario if you go back to the industry results. Prior to June 2020, there was adverse development.
And I'm talking.
Automobile insurance.
Simultaneous particular.
And if you look at.
T y D for us in automobile insurance, indeed, so far.
In 2021.
We have 3.5 points of favorable development.
And not that I want to bring back.
And on the hard work, we've done in the tree for years before that but what you will see is that the <unk> in the few years before that was out of sync with the historical context because of inflation.
And was essentially flat.
And therefore pricing so all.
Those pricing works.
Pricing works.
In the following fashion you go back you think 3 to 5 years the last 3 to 5 years.
You project them in the future.
And you use that to figure out what are your prices are adequate.
And I would see.
Suggest that if you look at the past 5 years, where there has been.
No favorable development or adverse development at the industry level, you project them in the future.
Restore.
Performance for driving.
The answer is.
If you do your job properly from an actuarial point of view you can a favorable development in a year and seek rate increases over time now there's a lot of extra reason the skull.
If I'm wrong guys.
Correct me, but the mechanics of this would suggest your cat.
Thank you.
Yeah.
Thank you next question will be from Tom Mackinnon with BMO. Please go ahead.
Yes, thanks, good morning.
Sure.
Just to be clear the increase in the cat guidance has nothing to do with your nice accretion that you're expecting from the RSA acquisition.
Is that correct.
So I mean, we.
That was all factored in but you're just announcing that to the street, but all of that $5.70 cat stuff is factored in when you did your nice accretion correct correct, 100%.
Just wanted to make sure everybody is clear on that now.
Further at the.
RSA portfolio in particular, the $250 million in expense synergies it doesn't have anything to do with improving the loss ratio at RSA.
There are really improving the yields at RSA you'd have any update as to what the potential.
Look for those kind of improvements are as <unk> ER.
As you go on another 3 months here with that.
Moving to these portfolios.
Yeah.
Thanks for your question.
It's the daily question at intact, and we want to make sure we leave nothing off the table to be clear.
But.
Why don't I ask Luis to share his perspective, and then I'll add some color.
Thanks, Charles so on the $2.50, so that number is still the target we're aiming for you're right. It is largely expense driven.
We have not yet.
Updated any guidance for it.
Loss.
Loss ratio improvements you know those are the ones, we're working on but they may be a bit longer to develop as we study the data and compare it to ours.
The on asking the question to Charles every day on how we can reflect that in my estimates but.
Still waiting for those estimates that come back.
But at this point, we are sticking to the expense synergies of $2.50.
<unk> working on making sure that those are delivered as quickly as possible and our visibility on those is quite strong. So we're not.
Every confidence in realizing them.
And then the loss ratio ones will be incremental to those synergies on.
On the expense side, given where we are and into integration like I'm.
Very comfortable.
With those because we have the bottom up.
<unk> of the synergies we can generate on the expense side of things, we're tracking that on a monthly basis.
And our process, we're very very familiar with on the loss ratio front, that's clear that.
That there are unfortunate easier, we're moving fast in bringing the business on our platform in Canada and in the U K I mean, we've done a lot of work with the team in the past few months.
You know, it's been demanding no no doubt about that for the team, but they have really good momentum.
I'm very pleased with the action plans, we've got detailed metrics to keep track of the performance improvement.
Plan in <unk>.
And I see some upside.
In the UK.
Portfolio as well now.
I think that.
The upside.
<unk>.
In my mind, that's good and we'll try to get as much as we can.
And the market I think is conducive.
See this also as a way to.
Upset potential surprises so.
We want to refrain at this stage from updating.
Views on accretion and loss ratio improvement.
But we're certainly focused on those.
And the yield performance.
Any way of increasing the yield on the RSA portfolio is pretty low.
Yeah, absolutely. So we are working on this we are working on.
The asset mix of course, we've reset the yields to the current yields.
Upon the acquisition, so that took them down to market yields essentially.
But as we integrate the portfolios together, we are moving to a.
A bit more of an oven intact mix overtime, and we are sort of leveraging some of the opportunities and expertise they have it.
At RSA.
To move it up at this point our guidance reflects some of the asset mix that we will be taking place in the next 6 to 12 months that wasn't my $100 million.
Investment income I shared with you earlier.
And then we're going to be working on trying to.
Optimizing that a bit further and keep it up at this point, though we're.
Sticking to the 100 for the next.
For this year at least yes, so werner.
Moving on and Dave Tom Lee will run the asset side here on intact.
<unk> bin.
Totally on top of the integration first order of business, obviously, its governance and the operational integration of the asset side.
On a big.
Assets optimization exercise in the past few months.
Or indeed fortunate these as you know our thought process on the asset side as total after tax return.
Optimized for regulatory capital requirement local tax regime.
And obviously.
And so.
The fact that we're operating across really 3 big platforms creates opportunities to optimize the mix. We've got a plan for that and we will start to execute on it in the coming weeks.
Okay and a quick follow up is on the integration costs for those.
Of those 35.
In the quarter because.
I think that's what you said because it shows acquisition integration restructuring costs as being $138 million in the quarter. So maybe you can.
Describe what the differences are and whether how.
Recurring this 138 number in this quarter will be.
So the 1.
38 includes the acquisition costs as well for the transaction. So its the acquisition part of the expense. There are also some integration from prior acquisitions that are still going on there and specifically for RSA at West 35.
And.
And then what we expect in the future quarters.
<unk> up so much on the other restructuring costs, but on the RSA..1 is what I guided to half of the guidance of 1.5 to 1.7 times.
Synergies.
And no acquisition costs that would have been baked into the second quarter number I assume.
They're largely done.
Okay. Thanks, so much.
Thank you next.
Next question will be from Jamie going at National Bank Financial. Please go ahead.
Hi, Jamie.
Just a couple of quick clarification questions for us.
Cat guidance, increasing from 300 to 570 <unk> did you state how much of that increase is in Canada on how much is in the U K.
Hi.
We have not.
We sort of stayed away from that and simply because the perimeter is give us a bit more diversification opportunities not sure whether it does spike in 1 country or the other so we stuck to and over.
For all team and provided guidance in terms of personal.
On timing.
But we stayed away from the <unk>.
The countries to be fair, if I was to model something maybe I put 2 thirds in Canada.
Third in the UK, but we're sort of not.
Committing to it in terms of.
Sure.
That being a firm commitment here, it's more of a bit of a guidance rather than that I wouldn't go further than that.
Net.
Understood and then in terms of the Denmark assets now.
It.
It.
Is the valuation of that.
That asset.
Im assuming theres a gain that will be attached to it as part of the transaction is that in the book value added.
Or should we expect to see a gain on Denmark.
In the in the next year when it closes.
So the the assets our share of the assets is recorded on the opening balance sheet at the value that was agreed upon with our partner trig.
So that's how the value of their it comes up.
The transaction has been announced is not closed yet. So there is a couple of conditions to get to closing and Thats expected somewhere early in 2022, probably end of Q1 early Q2 and the difference between the price agreed to on the sale and the value that we've agreed to with trig will be.
The recorded and at that time of closing.
Yes, I think what I mentioned in my remarks.
Jamie is that.
When this this transaction.
The aggregate level from an economics point of view should help the IRR by 1.5 points.
And as a result, you are consistent then then you would expect again when we close.
Okay. Good.
On the same page on last month.
In terms of the distribution.
Income in this quarter.
<unk> higher can you.
Can you breakout or walk us through the drivers of that game.
So on commissions on variable revenue to show up on explain what that is and then how much is how much is on site contributing to.
To the upside here.
Thanks for the question Jami so.
Quite happy with the growth here, we're seeing in our distribution income very well aligned with our objective of growing distribution.
And to add a strong earnings stream to support our mid teens ROE. So this is clearly going in the right direction. It grew 51% in Q2, and I would say about 33% of the 51.
30.
Points of the 51 is really driven by the variable commissions that has been part of our underwriting performance. So far so you'll see it in the.
On the insurance business with an extra expense ratio or a higher expense ratio from commissions and this comes back and the distribution income.
<unk> 33 and of the 51% 3.3 points are driven by these variable commissions.
There's another 13 points, that's driven by what we consider to be organic growth.
The business and Youll recall last year in the second half of the year, we had a pretty solid organic growth in our distribution network and.
Income carrying on in the first half of the year. So those are the 2 main drivers you ask about the onsite. So interestingly on side do you remember when we bought it was meant to be a counter cyclical earning stream when we had multiple cat events, while Q our half year, 1 has been fairly quiet on.
This is side. So on site has been probably a bit more quiet than than we wanted.
So it has not been a huge contributor to the growth in Q2.
So far there's lots of potential for on site going forward.
And particularly with the <unk> acquisition, but from a Q2 point of view as.
Not a big driver.
Last comment I'll make there is of course.
51 looks really good at is but we're also comparing to Q2 last year, which was a tough quarter from a distribution point of view you might remember we were very cautious in our earnings expectation there given the uncertainty.
On the whether COVID-19. So not only are we have good variable commissions, we have good organic growth, but we're comparing to a weak Q2 last year. So those are the main drivers and I would say, we're guiding right now to 10% to 12% growth in the second half of the year.
And thats really taking into account that last.
<unk> <unk> was very strong.
And if you combine 10% to 12% growth in <unk> with what we've done so far to date. This business is growing north of 25 per cent for the full year. So.
Big contributor to our earnings growth. Thanks, Louie I think Theres a couple of things that our award highlighting in this the organic growth on broker.
Tier 1 is really strong unclearly.
<unk> lines.
Hard market that's helpful and.
Really conducive to strong performance in distribution might be good Darrin. If you highlight your view on the state of the commercial lines market and the other point I think we should touch on is because we're bringing.
Currently on site into the question just to help you visualize what we can do with on site I'll ask Patrick to talk about what's going on in BC.
Lytton and what can be done so Darren maybe quickly yeah. Thanks, Ross I mean, I think I would describe the conditions in Q2 is very consistent with Q1.
<unk> hard market, north and south of the border capacity continues to be tight.
Our rate increases are very consistent from from Q to Q1, and we see no signs of that abating at all.
And really strong performance from a rate standpoint, north and south of the border now on.
You've got to be careful in terms of the portfolio in the U S compared to some of the other benchmarks that are out there I mean different segments of the portfolio are quite strong I think I mean accident is 1 area that due to profitability. There is a little bit of pressure from a rate standpoint, but again thats a line of business that operated.
<unk> consistently in the Eighty's, so no surprise, there, but otherwise outside of that we're pushing well into the double digit range.
In other lines and Thats very consistent with what we've seen in the last caught up but also in the last 12 months prior as well.
And we're seeing good strength in the in the UK as well maybe on on site.
Slide <unk>.
Just to illustrate a little bit.
I think in the remarks about the <unk>.
Wildfire in lithium BC that that and last.
Few day of the quarter in June.
First of all just to.
On the rate that the full estimate the ultimate cost.
<unk>.
In Q2, but from an operational perspective.
We were able to deploy our internal cap team, but also.
Our national GAAP.
Pat.
On site to support that.
The team of lithium.
Examples of what this brings to their response is on site.
Been retained to provide all of the security fencing and checkpoints and the city would've been retained as well by the lithium first nation to coordinate all the white goods removal fridges, and freezers, which always require special handling and we continue to work very closely both with our internal cash theme and on site.
With the talent and the 31st nation as well as the.
The team at Rubicon with.
On the organization of the minute, they're veteran leading the response for the industry. There. So we've been that.
Deploying a lot of capacity to support our customers who are facing obviously a difficult time.
Thanks, Patrick.
Okay great.
Very good I'll re queue.
No further questions Jamie.
Ah well actually.
Nobody else.
I did want to touch on that.
1 aspect and Thats the ROE objectives.
200 basis points are I presume that applies to all of our Egypt, Canada U S. U K and I was just hoping that you could.
Dive into what that means from an ROE perspective in each geography, and and perhaps maybe timelines around that.
Well that's a good question.
You know we were firm on the ROE outperformance objective of a 500 basis points every year, that's the first point.
As you know outperformance Jamie is the mindset.
And it's driving the strategic choices, we're making.
On what estimates were making on the data front.
On the AI front risk selection claims on supply chain management no change and this is the lens we use.
When we go into other markets as well so if you look at the work we've done.
And the work, we'll do it Scott and team.
We're really focused.
<unk> been on risk selection.
Working with Carl Huddleson is really strong the claims head of the of the UK business as well to help them create outperformance there. So there's no change obviously.
Our outperformance position in Canada is really strong and.
As we increase our scale advantage will be now 2.5 ish times bigger.
Then number 2 this is really helpful to expand our advantage will be focused on this.
If you look at the U S.
In the U S from my perspective, we have created.
Focus now close to.
4 ish points of combined ratio advantage against our peers in specialty lines I don't think we're 100% there, but we're clearly well on our way and I think in the UK will need.
Probably 3 ish years in my mind to.
<unk> from.
Being in the industry back to creating some distance and and that is the definition of success for us so a bit of headwind I would say in terms of ROE performance as you went through a new jurisdictions, but.
But I think theres no doubt as to what success.
It looks like and this shapes, where our time, our energy and where money goes.
If I can add Charles so operating basis still aiming for that mid <unk>.
Mid teens level and confident that we can maintain that on the current environments.
Environments, I think that strong when we look at outperformance what we're building now.
In fact, a blended.
Industry are they willing to integrate a weighted level of industry are we in the U S. And then eventually industry are we in the UK that will compare ourselves to so public.
Publicly because remember we manage our balance sheet centrally.
From.
All the assets.
Now is this essentially managed centrally and therefore the row of IFC is 1 we want to compare to and the best comparative for us would be a blended ROE between the 3 parameters. We operate in so we're building that and trying to build that it's difficult to have industry. Good industry data in the UK right now.
We're putting those together.
I see them getting published more and more over time in our in our financial reports, so youll be able to see how we tracked.
I'd say most importantly on the operating are we part.
That is still.
From the in the mid teens range going forward, Yes, I think it's important to keep in mind outperformance is the mindset.
Set but at the end of the day. It felt performance leads in certain jurisdictions to single digit ROE, it's not good enough.
And we're not shying away from being rewarded for the risk we're taking even if we outperform and I think there is work to be done, but those 2 core principles are the lenses were.
We are using to assess the footprint at the moment and how we're positioned in each markets, where we operate.
That's a great answer on.
Look forward to the upcoming disclosures. Thank you.
Thank you.
Thank you and at this time Mr. Anderson, we have no other questions. Please proceed.
Thanks.
To everyone for joining us today following the call a telephone replay will be available for 1 week on the webcast will be archived on our website for 1 year transcript will also be available on the website and the financial reports and filings section.
Lastly, we will be hosting on Investor day on Tuesday November 30th.
On the event will be held.
To lead and will be accessible via webcast more details on the 2021 on Investor day will be available on our website in the coming weeks and we look forward to welcome you welcoming you at the event.
Finally, our third quarter 2021 results are scheduled to be released after market close on Tuesday November 9th.
Again on this.
Today's call.
Thank you Mr. Anderson, ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.
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Thanks.
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