Q3 2021 Intact Financial Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the intact Financial Corp, Q3, 2021 results conference call.
At this time all lines are in a listen only mode and following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator, I would like to remind everybody that this call is being recorded today Wednesday November the 10th 2021, and I would now like to turn the conference over to Mr. Ken Anderson.
<unk> Vice President of corporate development and Investor Relations. Please go ahead Sir.
Thank you Michele good morning, everyone and thank you for joining the call today, a link to our live webcast and published information for this call is posted on our website at intact Etsy Dot com under the investors tab as usual before we start please refer to slide two for cautionary language regarding the use of forward.
Statements, which form part of this morning's remarks.
<unk> three for a note on the use of non <unk> financial measures an important.
Terms and definitions used in this presentation.
Me today, we have our CEO Charles bring to more our CFO Louis Marcotte, Isabelle Girard SVP of personal lines, Patrick Barbeau, EVP, and Chief operating officer, and Darren Godfrey EVP of global specialty lines will begin with prepared remarks, followed by <unk>.
<unk>.
I'll turn the call to Charles.
Well, thanks, Ken Good morning, everyone and thank you for joining us today.
As society continues to navigate the shift from a pandemic to an endemic disease and in fact, we remain focused on being there for our customers in both good and bad times protecting our employees and an evolving work environment and helping to build a resilient society that can grow.
And prosper.
Our ability to do all of this is largely due to the momentum in our business and the resilient and strong performance we continue to deliver.
This last quarter was no exception.
Yesterday evening, we announced third quarter net operating income per share of $2 87, a 3% increase over Q3 last year.
Even by strong underwriting and distribution results.
Upper single digit accretion from the RSC acquisition.
With our operations performing really well a strong balance sheet and a favorable outlook for capital generation. We are pleased to increase our quarterly dividend by 10% to 91.
Continuing our 16 year track record of annual increases.
Top line growth up 68% was obviously driven by the acquisition of RSA, but with approximately 70 points of organic growth, reflecting strength in commercial lines across all geographies.
The overall combined ratio was solid at 91, three despite including seven points five points of cat losses double the expected level.
Following several severe weather events in the quarter, our teams moved quickly to get our customers back on track.
Now, let's look at our results by line of business, starting with Canada. So in first.
First of all auto premiums grew 27% year over year with 1% organic growth.
<unk> ratio was again strong at 85, 1%.
Our personal auto business is solid and it's well positioned to operate at the lower end of mid Ninety's as we integrate RSC.
Looking at the industry, we expect muted premium growth in the near term until driving patterns return to pre pandemic norms.
The personal prop premiums grew 34% organic growth was healthy up 5% driven by firm market conditions.
We expect to continue given the challenges that weather and climate change present, the combined ratio of 93, 5% is right in line with our view that this segment should operate sub 90 fives, even with severe weather.
In commercial lines premiums grew 33% in the quarter, including eight points.
Organic growth.
The 91, two combined ratio was strong reflecting our profitability actions over time looking at the industry, we see hard market conditions continuing.
Our Canadian commercial lines business is well positioned to deliver low ninety's or better performance going forward.
Moving to our <unk> business. The first full quarter added $1 3 billion of premiums to our platform in line with our expectations.
Combined ratio of $93 nine was solid and included 10 three points.
Our cat losses, approximately six points above expectations first lines with a 97, 9% combined ratio. It's clearly an area of focus for the team we already have action plans in place.
In commercial lines, the 95% combined ratio was strong.
Overall, the <unk> business is in a good position and we're focused on building sustainable outperformance.
Looking at the industry, we see softness in personal lines in the UK ahead of reforms next year, while the commercial lines environment, It's hard.
Our U S commercial business premiums grew a very strong 21% in the quarter with hard market conditions and solid new business contributing.
The combined ratio at 92, 8% with solid.
Despite including four points of cats. This business has very good momentum and the U S team is executing on its objective to deliver sustainable low ninety's performance.
Turning to our RSA acquisition, which we closed in June the integration and transition are on track across the board.
In Canada, nearly all of our RSA colleagues have been on boarded into our HR platform.
There are strong traction and engagement with the brokers that affinity partners, which further solidifies our outlook on volume retention.
Policy conversions in Canada are well underway and we're on track to begin to shutdown systems in 2023.
We're also integrating our claims operations and leveraging our supply chain capabilities to deliver a strong customer experience while realizing synergies.
In the UK by segment, it's all about building outperformance.
There are three near term areas. We're focused on first for personal lines, we've already launched initiatives to increase pricing sophistication and to be ready to compete as pricing reforms come into effect in 2022.
Second in commercial lines, it's about growing in the segments, where RSC as already a sound and high performing offer it's about building on our strength. Great example is the mid market in the U K.
At the same time, we're tightening our focus in areas, where do you kind of makes our netback in our favor.
The third area, we're looking at in the UK is to simplify the business operating model and the technology platform to increase agility and help deliver on our outperformance.
Our global specialty lines, there's been strong collaboration and engagement across regions.
In fact onboarding into RSA, its global network as commenced which brings in house the ability to support global customers.
Finally, we are spending considerable time assessing the potential capabilities for our global franchises and have identified a fortunate is to leverage our expanded scale and expertise to drive meaningful outperformance.
Alongside the RSC integration our teams continue to advance our strategic roadmap distribution earnings has become a significant contributor to our performance and growth.
<unk> dot compounding at over 20% over the last five years.
We expect the momentum to continue in 2022 and as we continue to build scale in Canada.
In August broker linked acquired archway insurance in South coast insurance, doubling our size in Atlantic, Canada, and becoming one of the leading east coast brokers.
In our direct business delivered direct has evolved.
Offer to create a simplified insurance experience for customers by reducing the number of products forms and rules by over 50% in the last two years. Our coverage is now easier to understand and coupled with the improvements to our apps drive digital engagement.
Yields a better customer experience and that's driven our industry, leading direct distribution expense ratio to below 20%.
The significant jets experienced in this quarter Act as a reminder, that our customers are facing the divesting impacts of climate change right now.
Globally. The last decade was hotter than any period in the past 125000 years.
In Canada heating at twice the global average.
Societies collective efforts to transition to net zero carbon emissions are critically important.
At the same time, we must double down on adapting to the current extreme weather impacts of climate change and this requires an approach that includes government Ngos businesses and individuals and in fact, we've invested and community efforts to help get critical projects off the ground, including through our Cigna.
<unk> investments and the impact centre on climate adaptation.
Our investment team recently joined climate engagement, Canada and initiatives that drive dialogue between the financial community and corporate issuers on climate change risks and opportunities and we are taking important steps to transition our own business at zero.
Clear actions will ensure that we can help society better protect our customers and.
In the marketplace.
In support of data just wrapped up a few data top 26, the United Nations Climate change conference in Scotland.
As a member of the Canadian delegation and it's our goal to help build a clear road map to future proof.
<unk>.
In conclusion momentum across the business is very strong and the <unk> acquisition has significantly advanced our strategic roadmap on all fronts.
Our ability to deliver strong results react quickly when weather events happen and make strong progress on the RSC integration and our broader strategic agenda would not be possible.
Without our people.
And I want to thank them for their continued engagement and calibration.
As we set our sights on 2022 and beyond we have a clear focus on what we want to achieve.
And that is to provide second to non customer experience with an engaged workforce and to continue to deliver on our financial objectives to grow net operating income per share 10% annually over time and to outperform the industry ROE by 500 basis points every single year.
Sure.
That I will turn the call over to our CFO Louis Marcotte.
Thanks, Charles and good morning, everyone.
We delivered solid results again this quarter.
Despite heavy cat losses, well above our expectations for the third quarter.
Very pleased with the performance of all of our operations delivering a 91 three combined ratio and net operating income per share of $2 87.
These results include RSA is Canadian and UK operations and as expected. The acquisition was immediately accretive contributing 8% to our Q3 net operating income per share.
Underwriting income grew 15% to $426 million compared to a very strong Q3 last year as robust performances across all segments continued to reflect the benefits of our actions over time.
As expected prior year development was healthy at two 6% of opening reserves.
We continue to expect favorable <unk> and the 1% to 3% range in the long term, but at the upper end of this range in the short term.
Net investment income of $191 million increased by 34% year over year, driven by the addition of <unk> investment portfolio, we expect a similar level of net investment income in Q4.
Distribution EBITDA and other income continued to outperform our expectations growing an impressive 30% in the quarter driven by higher variable commissions as well as solid organic and M&A growth.
Keep in mind that these earnings are partly offsetting the elevated variable commissions and our Canadian expense ratio.
Looking ahead, we expect growth for the fourth quarter to be in the mid teens. Following a strong Q4 last year.
For 2022, we expect EBITDA to surpass the $400 million Mark on the back of continued momentum in the business.
Looking at underwriting results and a little more detail.
First the Canadian segment.
In personal auto the underlying loss ratio of 62, 5% remained strong slightly increasing in the quarter to reflect an uptick in driving activity.
Our telematics data suggest that the kilometers driven are nearing pre pandemic levels.
Claims frequency remains below historical averages.
Favorable prior year development was healthy at four 7%, reflecting reduced uncertainty around claims patterns during the pandemic.
In personal property. The 93, 5% combined ratio reflected 17 points of cats, which is 10 points higher than expected.
This was offset by a weather driven for four point improvement in the.
The underlying loss ratio and higher favorable prior year development.
Looking at commercial lines high single digit organic growth is driven by rate momentum in what continues to be hard market conditions. The underlying loss ratio of 56% was very strong as the benefits of our profitability actions continue.
The overall expense ratio in Canada increased two two points to 32% largely driven by a higher level of variable commissions. Following continued strong underwriting performance.
Addition of RSA had a positive impact on the expense ratio, thanks to a higher proportion of direct business and the benefit of synergies.
Overall, our Canadian business performed very well despite heavy cat losses.
The addition of RSA as Canadian segment had a slightly positive impact on the combined ratio in the quarter.
We saw solid performances in personal lines, while commercial lines saw a fair bit of non weather related cat losses.
In the U S. Our business is doing very well both from a top and bottom line perspective, great momentum continues to be strong and favorable market conditions.
Our 93% combined ratio after nine months is aligned with our low ninety's expectations after considering excess cat losses.
Turning to the UK and I am pleased with our first full quarter of results.
When we normalize the reported combined ratio for excess cats. We are ahead of expectations. Thanks to benign non cat weather and fewer large losses.
It remains early innings and although it has only been one quarter, we like what we see thus far we.
We expect this business to run sub 95 in the near to mid term.
IFC is earnings per share for the quarter was down close to 30% due to RSA related integration cost as well as the partial sale of shares and impairment losses related to a venture investment that IPO in Q1 of this year.
After considering the $273 million gain recorded in Q1 and realized losses and impairments. This quarter. We are left with a net gain of $69 million on this investment our remaining position in the stock today is minimal.
As we near the one year anniversary of the announcement of the RSC acquisition, our view of the financial merits of the transaction remains very compelling we.
We delivered high single digit accretion after four months against a strong standalone performance of IFC.
We delivered $24 million in earn synergies year to date and are tracking towards an $85 million run rate by the end of 2021.
We can beat our $250 million target within 36 months and this is without reflecting any risk selection and improvements to the loss ratio.
And finally, we have agreed to an exit of the Danish business unfavorable terms.
When considering all of these elements, we see the IRR of the RSA transaction tracking near 20% above our initial calculation.
Moving to our balance sheet, it's been a busy quarter. Our teams have been working hard to combine our asset portfolios migrate the asset allocation towards our optimal mix and at the same time capture opportunities in the market.
We have also been successful at refinancing of some of the UK capital instruments into Canadian debt instruments with positive impact on our financing cost and capital structure.
We have derisked, our Canadian pension plans by purchasing annuities, representing approximately a quarter of the total Canadian pension obligations.
Our financial position continues to be strong we closed the quarter with approximately $2 7 billion and total capital margin a healthy buffer to absorb potential shocks, reflecting strong regulated capital ratios in all of our jurisdictions.
Our debt to total capital ratio was just below 24% at the end of the quarter.
The proceeds from the sale of code in Denmark will be used for deleveraging.
The remainder will be used for growth opportunities or buybacks as for our well established capital management framework we.
We expect to reach our debt to total capital ratio target of 20% well ahead of the initial objective of 36 months.
The strength of our results over the past year has led to an operating ROE of 18, 3%.
With the acquisition of RSA and the Progressive return to normalcy, we expect our operating ROE to migrate towards a mid teens level.
Given the pace of earnings growth.
Bolstered by RSA as earnings and synergies and the strength of our balance sheet, we have increased our dividends by 10% this quarter and we expect to resume our usual dividend increase announcement at the Q4 earnings release in February 2022.
Our society cautiously moves towards a post pandemic new normal our priority remains delivering on our strategic roadmap with the RSC integration well on track and strong earnings momentum supported by favorable market conditions, we are well positioned to emerge from this pandemic with continued strength and outperformance.
Together with RSA, we have a highly resilient platform with significant growth potential and I am confident in our ability to continue to create value for our shareholders.
With that I'll give it back to Ken.
Thank you Louis in order to give everyone a chance to participate in the Q&A. We would ask that you kindly limit yourselves to two questions per person.
Of course, if there's time at the end you can certainly re queue for follow ups. So Michelle we're now ready to take questions.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the one on your telephone keypad. If you would like to withdraw your question. Please press the star followed by the two.
Please standby for your first question.
Your first question comes from Paul Holden of CIBC. Please go ahead.
Thank you.
So wanted to ask first off maybe you can dissect a little bit more of the trends for personal auto just in terms of.
Frequency and severity and I guess, there is some particular concerns around severity trends.
The industry somebody you can address that and how youre thinking about that going forward.
Thanks, Bob Thanks, Paul I think that's an important.
Question.
Driving is definitely.
Very close to normal if not at normal patterns of driving DAU are different.
Maybe I can ask is that bad to share her perspective on what we are.
Seeing from driving.
Point of view and to a certain extent frequency, but I think more importantly, maybe Patrick can give his perspective on what we're seeing.
Ah severity point of view in claims we've been on that for years as you know.
And I think will provide his perspective, but is that bill why don't you kick this off.
Sure. So in terms of driving and frequency driving stays close to about 5% below historical average for a few weeks now, but we still see fluctuations week over week and one region versus the data.
Frequency is also still below pre pandemic levels, but it does been added.
Since the start of the pandemic entering into September.
We're following.
Mobility indicators, both internally and externally and all of those indicators are showing consistently you are driving in 2021 versus 'twenty.
<unk>.
What we see also is that to return to the office.
He is congestion, especially the morning rush hour and Nic trends indicate there is.
Increasing since the end of the summer, but we see it's taking a bit longer than anticipated to return to the pre pandemic levels and we believe thats. What is explaining why frequency is still below historical levels, even if the driving is pretty close.
<unk> continued to return to the office in the coming months, we expect the driving active data continue to rise.
And we'll be following that very proactively to add up our strategies.
That's what we think.
Yes, Thanks does that data.
So I think I mean, we've been.
Observing inflation in personal automobile for some time why don't you share with us what youre seeing now and what was there before maybe.
Great.
Yes, so on the severity side, it's important to take into account as you pointed out.
Shout, some mitigating actions that we've been taking as well as some offsetting factors that we currently observe in the supply chain. So.
So in severity first of all it's important to mention that on the injury side, we see no no salary increase there.
This is reflective of our prudent approach in reserving since the start of dependent Mick on the short tail lines. So the physical damage, we do see a 5% increase in severity. When we compare Q3 this year versus same period last year and this is driven by two main factors the first one.
Is that bill talked about driving habits that create less concentration of driving in the rush hours, especially in the morning.
That creates proportionately.
More severe accidents, so there's less of the small bump our claims in the mix and that in itself is driving about three points of that five overall, 5% increase in severity.
The remaining 2% continues to be driven by the technology in cars.
So when we say that we mean that the parts are cresting.
Higher but also the complexity of the repair process.
Thats create more cost.
We've identified that.
At least three years ago and have started to implement mitigating factors in the way we handle the claims as well as in as in pricing.
There's a lot of.
Indicators on the price of new and used cars and we see as well here in Canada double digit inflation on market values on the scars and even higher figures in the twenties for some makes and models, but this is where we have some important offsetting factors. This has very limited in fact currently on our.
Severity.
That's a very few of our of our claims because.
The car has declared total loss, which is when we have to replace the car by new one our used car we sell the damage our Florida parks and we've seen significant increases there in the recoveries. So net net on the total last one I look at Q3.
Total loss severity is actually slightly down in Q3, this year versus last year.
So we're really reflecting these trends and our actions will continue to leverage the tools that we have to mitigate some of it and this is why when we look forward. We say this business is well positioned to operate in the lower part of the mid nineties on a go forward basis.
Thank you thanks.
Sure.
So thats worked for you Paul.
It does it's very very helpful. So I mean, partly given that answer what I wanted to ask a bigger picture question. So Louis just said that your expectation is for the.
Roy to migrate back down into the mid teens, which has been our long standing target I would ask today given increased scale advantages the investments you've highlighted that you've made in the business over time to increase your competitive moat.
And then.
And just more favorable earnings mix I would argue over time like why isn't that ROE objective pushing is something a little bit higher.
Yeah, Paul the objective is to outperform the industry ROE by at least 500 basis points every year.
We've built out purely our leadership position in Canada, and the strengths, we've invested in namely pricing risk selection and claims supply chain management.
For the past couple of decades are driving the outperformance keep in mind.
We're building a business in the U S and I think the U S team has done a great job.
To create outperformance over a four year horizon I am very pleased with the trajectory there, but I think in the U K, we need to build outperformance.
And as such when I think about above the objective.
There is a lot of momentum in the organization no doubt about it we've invested in our strengths.
Sandbox in which we're operating it's bigger and we need to create outperformance across the platform and that's what.
We're focused on Louis.
I don't know if you want to provide additional color here, but not going to guide towards.
Yes, a point estimate.
Yes, maybe.
I think if you listen to the guidance in terms of long term expectations for the combined ratios as we get back to normalcy that generates that tends to migrate towards the mid teens ROE. So that's consistent I think we're trying to.
Guide everyone here into into the the guiding or take lighting of ROE towards that mid teens level compared to where it is today.
The other dimension, we need to keep in mind is the noise growth objective as well.
So we got a balance a bit to two here and I think the mid teens target that we're aiming for.
It's consistent with the EPS growth target that we're trying to achieve as well.
Okay fair enough I'll leave it there thank you.
Your next question comes from Geoff Kwan of RBC. Please go ahead.
Hi, good morning.
You've had this dynamic now where the pandemic just helps the claims ratio in that in terms of increase your expense re.
The ratio from the higher variable Commission.
And which has also resulted in higher distribution income and so my question is relative to the pre pandemic levels like what has been the net impact on the ROA from these different variables.
Thanks, Jeff well first of all the expense ratio is up.
Not down because of variable Commission thats the first point.
I would make.
Think that.
As you think true what we've done independent making you go back to March 2020, when dependent make started.
We've put in place right at that moment.
A relief program that was risk based.
Needs based.
And provided.
Our customers close to 650 million Bucks.
Really.
Big portion of that has been earned.
Already.
And beyond.
Beyond some of the relief.
Provided.
Rate adjustments, where appropriate but again based on the risk.
And on a need basis. It's also important just to keep in mind that we.
You've put up in commercial lines north of $1 million of reserves for Pandemics.
Balance.
At this stage if you take a long term perspective.
Net benefit is.
There's no real major net benefit here given the relief we provided given the impact that.
<unk>.
The commercial lines.
Cost of Covid has been in some of the rate adjustments that have been put in place. We I don't know if you want to provide additional color on this front.
Well I would say the <unk>.
Commissions are up but keep in mind, there, but sharing some of the benefits we have from the better combined ratios and then we get some of it back through distribution. So the net effect of the higher <unk> is largely offset by the distribution income and then it leaves a net benefit of just a better performance.
Net to us and Thats positive to the ROE. It's clear we have not necessarily try to match the exact or we benefit with with that dynamic.
But given the strong combined ratios, we delivered despite higher <unk>.
Positive and then we capture the distributions coming out ROE calculation. So I think net net it's positive.
I wouldn't be able to peg a number specifically to the pandemic portion of it.
Okay.
Question is just as we're starting to see more growth in terms of sales of electric vehicles.
What sort of work our way.
What have you done to give yourself comfort around appropriately pricing.
Auto insurance policies for Evs to avoid negative surprises down the road.
Yes, it's interesting Jeff So first of all it's not a big portion of the <unk>.
Car pool.
I'll, just say that and second there is a very different profile in terms of claims.
Both frequency and severity.
Within.
Electric vehicle.
Category, where the difference for cheaper electric vehicle.
It's quite another difference, but the patterns are very different for the more the more expensive debt.
Rick vehicles, so it's hard to generalize I'll ask you said data to share her perspective on that because cheese pricing for these differences.
Yes, so we've talked about in the past our pricing segmentation that is quite criticized with machine learning, but also with the data we have internally so despite electric vehicles being a small proportion of the pool of vehicle.
With our claims colleagues to look at the depot.
We price each make model and year individually and Thats include electric vehicles as well. So we want to be very segmented in our pricing to reflect the different types of costs. We may ask for those vehicles and that's what we've been doing in Boston continuing to do the more we get informed.
And data on those vehicles.
Okay. Thank you.
Yeah.
Okay.
Your next question comes from Michael Phillips of Morgan Stanley. Please go ahead.
Thanks, Good morning.
First question is on on casualty loss trends I guess, what are you seeing today, there and what do you think.
Where do you think that's headed.
Over the next year or so.
How does that differ for your U S business versus your Canadian commercial lines casualty business.
Yes. Thank you.
Again, another pattern we've been on for.
A number of years.
And I'll ask Darren to share.
His perspective on that and then maybe Pat. Thank you can you can chime in if there's anything to add.
Yes.
Yeah. Thanks, Mike I mean, you're right relative to one this is one that we've been watching for quite some time around social inflation.
Both in Canada and in the U S.
Social inflation is not a new topic for us it is not.
Incrementally increasing thats not our observation at this point in time. It clearly is more relevant for our U S operations than our Canadian operations, where our book in the U S is more heavily skewed towards casualty type exposure. So it's very much relevant to the U S. So we're watching very carefully I mean it exists.
It's in place but.
Nothing of material concern and in fact, if I look at sort of that loss trends that we have in place at the moment in the U S relative to the right.
That is flowing through the book.
We have a meaningful gap at the moment between our loss trends and are rates that are flying so we're quite comfortable from that standpoint from a Canadian standpoint, obviously, we've been watching this one quite some time, it's obviously been very very relevant on the personal auto side that we've been fighting obviously in terms of longer tail coverage for some time.
Obviously on the commercial side, it's mall property influenced compared to the U S.
But nonetheless, we're still watching very very closely social inflation, but similar.
To the U S.
Nothing material no real sort of net change in the environment like.
Mike.
But again.
There were also still continuing to push quite strong strong rates as well.
And then obviously lastly on the UK as well too very very similar from a Canadian standpoint strong rates watching both property inflation social inflation, but.
Good margin versus loss trends at the moment.
I think on the U S. The point there is a few points that need need to be made so first of all.
The duration of the liabilities in our U S book is actually very short.
Less than the Canadian book gets a little more than two years.
That's the first point the second point.
I would make is when we bought the U S business.
We've shut down three lines of business.
In the months following closing.
<unk> is a business that we've shut down.
Are the lines of business that have been most impacted by.
<unk> casualty inflation in the U S. We saw we.
We saw that.
I think a reasonable read on.
On older older accident years development and felt that we couldnt compete in a number of sectors, whether it's health care, whether it's architects and engineers programs and so one and we exited these lines I would say.
Where.
Our footprint in the U S. Now actually looks really good short short tail and we have a few lines of business where.
We're going through.
A curtailing.
<unk> of the portfolio lines that are under profitability improvement and they would be lines that have been more exposed to casualty inflation, but we've been working on these lines for three years. So these would be lines, we have not exited state and we feel we have a good shot at it.
Winning but we're working hard on the inflation there.
Rick do you want to share your perspective from a claims perspective.
Yes, very much aligned with what was already sure may be the only additional point I would make is.
We have a competitive advantage in the way we handled casualty claims.
We have a team that will reach with internalization of RSA about 600 lawyers and law professionals that handles more than 80% of these claims in certainly in Canada, and we've started two years ago to internalize.
A portion of the U S as well so I think that helps us manage these trends, but also understand very well the driving forces and where it is happening.
Okay, great. Thanks, that's helpful I'll wait until such yes. Thank you guys.
Second question, then would be a little more higher level, what kind of industry may be possible question, but as it relates to you guys in the past year, we've heard more certainly in the U S.
Of desire for.
MMS to offer insurance, whether it's GM or tests or whatever else and how do you think about that is that something that you see there and if so to what extent is that more of a threat to you guys or not for Tony and partnerships or just how do you think about that trend.
You know, Mike we've been focused on disruptive potential for over a decade, that's a theme that.
<unk> been focused on which is shaped.
Many many of the actions that we're taking today in our perspective back then was and it's still very much the case that disruption will take place at the distribution level more so than at the manufacturing level. That's our that's our thesis at least that's the basis on which we operate.
I'd say Oems.
Would be potentially one of those elements that could.
Disrupt.
Distribution.
Seen anything concrete meaningful at this stage no, but but we're certainly prepared for that it's really hard to manufacture a P&C product quite frankly pricing risk selection and claims management.
Prevention and so one is hard to hard to replicate.
<unk> the Oems as you know.
In particular in the U S have been in that business before and largely got out over time doesn't mean, they can't come back, but it's not clear to me that this is the.
The most prevailing threat, but anything that can disrupt.
Distribution of the product we're focused on what have we done about it over the last decade as well.
In retail.
We've built.
The strongest brands in the market place in which we operate we want to make sure that when Canadians think about P&C insurance. The first two brands. They think about our in fact insurance and better direct our second thing. We've done is we tried to digitize our distribution footprint.
And our customer experience as you know we've invested in designs for many years seven eight years aggressively.
Aggressively.
The other element that we've done is we've built our own distribution arm with broker link which.
Which is north of $3 billion of revenue, we have partnerships with a number of consolidators. It is contributing to our earnings while it's creating strategic optionality, which is really good.
And and.
And then invested adventures as well to make sure that we were in the flow.
Disruption and I think what I.
I put all that together, we remain hypervigilant about disruption and distribution, but feel like we've got many toolbox or many tools in the toolbox to deal with that now if you start from the premise that disruption will take place at the distribution level.
As a manufacturer of the product you want to make sure that your second to none and that's why we've invested heavily in.
Our predictive power capabilities and expanding our data set in AI. That's also why we've invested aggressively in the claims.
The operation to make sure that we manage claims ourselves to make sure that we're deep in the supply chain.
So that when people wanted to disrupt distribution.
They want to make sure that in fact is onboard from a manufacturing point of view so were preparing for this OEM I think it's just one.
<unk> disruptors in distribution, but we feel that we've created good optionality in the organization and build strong competencies to fight disruption.
When it comes.
Charles Thank you very much for that.
Youre welcome.
Yeah.
Your next question comes from Jamie <unk> of National Bank. Please go ahead.
Yes. Thanks.
Good morning first question just good morning, David in that still in personal auto with with driving.
To begin to normalize and severity a little bit higher.
Can you talk about the timing for when you might start to think or even.
Or maybe you are in the process of filing for rate hike approvals in various provinces can you just sort of talk us through where you are on that on that stage.
Yeah is that Bill why don't you share.
<unk> your perspective on that maybe talk a little bit about seasonality as well.
And first of all automobile, which I think is relevant for people to assess the sort of run rate and where this is going.
Yes, so as you mentioned and driving is normalizing.
But there are still a few things.
That continues to evolve and we are really focusing on following those trends.
Frequency remains below historical levels, because people are still digesting driving a bit then we have been proactive throughout the whole pandemic to follow this and we are just star rating strategy Accordingly.
It's not only that we made one one move in rates and that we're waiting for the new norm.
We have been continuously adapting.
The situation. So that's maybe one point to clarify.
We also see as Sean mentioned seasonality in the auto lines of business does have an impact on frequency.
Entering into data fourth quarter with the.
Wednesday for yard, where we can see spikes in frequency that are related to weather events.
Just to give you.
Respective on Q4, we expect around three points of unfavorable unfavorable seasonality.
Relative to personal auto.
As a business. So that's also something that we'll need to take into account and a bit like Patrick mentioned on the severity side.
While we've been at this for many years now we also need to make sure that we follow the trends and we adjust to that new norm that me and it comes out from the pandemic. So all of that saying that we've been quite active during the pandemic to add just star ratings strategy to this we're continuing to be.
Larry.
Proactive and in communication with regulators on what we see to make sure that they are aware of are really part of our strategy as well in the graduate all approach we wanted to take going forward to reflect the new normal.
So as I said.
Jamie It's Ed.
At the start.
We provided a fair bit of relief.
As one time.
Relief payments to to Canadians done the same thing in SME adjusted rates, where we felt that.
Driving patterns would be different for an extended.
Period of time, but we've done it in a way where we can react very quickly from a pricing point of view should driving patterns shoot up.
We did not put ourselves in a position whereby you price 12 months out and then 345 months.
Into your pricing cycle.
Driving a shut back up and regulators I think I've been I've been constructive in this process of understanding that this environment is very very.
Yes.
It's a new zone and as such we've created Optionality, but we've given.
A lot of relief so far.
But not all through rate some of it as I said through one shot payments because we felt.
Rating is tricky.
Here, because your price for 12 months and the world is changing.
Got it understood.
Second question is on the U K performance in this quarter looks good on the combined ratio but.
Focusing on more on the premium side of the equation.
It looks like flat in personal and reflecting hard markets and commercial I was just hoping you could.
Give us a little bit more color and frame, how how premiums look this quarter versus versus the industry.
Growth rates in.
<unk>.
Some of the dynamics that are at play and how we should expect that.
Premiums to evolve in both personal and commercial lines in the U K.
Yes high level I mean look it is it is early.
But since closing what have we done.
I've talked earlier in my remarks in terms of putting action plans to improve pricing and risk selection. Okay. So.
That is critical as far as I'm concerned to create outperformance in the U K. The team that built a lot of good momentum. These results that youre seeing this quarter or not the product of the actions we've put in place this quarter.
Product of the work of the team over the past few years.
And.
So first point pricing risk selection improvements.
<unk> point rationalizing the footprint of the organization, we want to make sure that we play.
Where we can win.
We want to make sure that we play where the economics are favorable to us and so there is a number of elements across the platform in both personal and in commercial lines at the moment.
We are trimming positions and certain distribution relationships.
And so what.
And.
And then the third element that is coming is the <unk>.
Pricing reforms in personal lines in early 'twenty, two that one needs to take into account there is a big dislocation at the industry between new business pricing and renewal pricing new business pricing being lower than the renewal pricing the regulatory change, which I think is quite good.
Will level up new business and renewal pricing. This will create I think a fortunate ts in the marketplace, but the personal lines environment in the UK in certainly in the first part of 2022.
Likely be quite dislocated so.
So when you put all that together.
I see a couple of things in commercial lines.
Alrighty.
Healthy.
Hard market environment.
We are curtailing our position in certain segments, but.
But I do expect healthy growth in that line of business.
And then the expansion.
Of of our margins there in commercial lines.
Not in consistent I guess with where we are in the cycle and relationship with the inflation both in Canada as well as in the U S personal lines as a whole different ball game for the three reasons that I've mentioned.
We are.
Curtailing the footprint.
We're bringing pricing improvement and then there are the reforms and the team's perspective and they've been very disciplined this year thats why youre not seeing much growth in personal lines were just not dancing with the market gyration here, we have our eyes firmly.
Focus on the combined ratio, we're have our eyes on creating outperformance and I do expect that we won't see much growth in personal lines in the near term.
As regulations work through the system.
And as performance improvement measures rollout in personal lines in the UK there might be growth opportunities as a result of the reforms and if there are we'll be there to capture then but.
We are in a moment, where we want to make sure we're positioned to create outperformance and as such I wouldn't bank on rapid growth in personal lines in the near term.
Thank you.
Your next question comes from Brian Meredith of UBS Securities. Please go ahead.
Hey, good morning Charles.
A couple of questions here for you.
Digging a little bit more on the physical damage severity in personal auto I. Appreciate the answer with respect to used car prices up but you're selling them.
The scrap is obviously for more money so that helps offset it but that also would imply that parts inflation is potentially pressure on severity as well and are you seeing that from parts inflation as well as other supply chain issues like getting cars fixed and back in the road additional rental car prices. Those things are you seeing that and I guess this is a.
A follow on to that does in fact have things in place to help mitigate that and kind of have an advantage over the industry.
And mitigating the severity.
Yes.
I think it's really good to go one layer down Brian because because youre right.
There is stuff happening in the supply chain.
That is changing.
A little bit and I'll, let Pat take provide his perspective on labor in the state of.
The repair industry, and probably worthwhile going back on a number of the measures. We've put in place two to three years ago to deal with the inflation that we've been focused on in physical damage just to give a sense to Brian of the advantages that we have from a claims management in our supply.
Pain management point of view.
Right.
So.
Bryan from.
On the parts.
Syed.
In Canada, so far we don't see a ton of disruption in terms of the availability of parts.
For sure like many other industries.
Three.
Is facing.
Hard labor market, and but so far it hasn't had a ton of impact.
On our cost the frequency overall being lower and the way we approach our.
Our.
Rely network. So we have good capacity.
Within our preferred provider. So that I think is one of the key advantage that we've built over the years and we have a.
Good capacity not only for current levels of frequency, but even as it returns towards normal. So that's one I think key important aspect.
On the used car parts.
There is a portion of the salvage I focused on on on selling the salvage.
Cars for parts.
But there is also an auction process, where some of these guys actually bought and repaired because of the demand and so it's not only all of it.
Use and parts.
With regards to some of the other advantages and actions that we've taken.
A big portion.
An important part of what we've done in the past two to three years.
Leveraging our data and deploy it to the frontline of savings. So one of the key elements in controlling cost in this environment with higher technology more complex repairs as to be able to.
And make quick decisions right from the first call. The first notice of less with our clients in terms of where repair that car.
We declared a total lesson replace it because.
Then you can direct to client more efficiently at the right place I avoid multiple towing cost storage fees and all of these things Thats also increase the length of time, we ask to provide rental so by leveraging our data and claims.
And.
The data that we've deployed tools that can quickly identify this.
We've seen savings actually.
With these actions on the rental.
Boeing storage, which are at the end.
So a significant part of the repair process.
Great.
What.
Ward.
Also mentioning that.
Ordering automobile parts is something we've been doing to fully leverage.
Our scale overtime, we've been doing that for many years, but thats really comes in handy in a world where there are inflationary pressure.
Makes sense and then my next question is sticking with personal auto.
1% organic growth.
Obviously, there's some headwinds with respect to B C.
But I'm just curious are you are you being more cautious with growth in Canada personal loans, given the integration of RSA in and maybe some uncertainties with respect to claims inflation why isn't this the time that youre really trying to get some organic growth.
Well.
Yes, I think that.
If we could get more organic growth at the conditions. We think are right from an adequacy point of view, we would Brian.
No doubt about it.
Well positioned we've done a lot of work in automobile insurance for many years, we think that priced adequately and we'd love to grow I think part of the issue.
Well that one yes, I would say.
Theres not a lot of.
I don't want to use the word traffic because that would be confusing, but shopping is down retention is up <unk>.
Currently Hi Shah.
Shopping is down.
And as such the cost of generating sales.
Is up.
Meaningfully so that's the first thing that one needs to take into account at least that's how we think about the business. So that's the first.
First point the second point.
Is that.
When you price a product you priced 12 months out.
Using <unk>.
Three years three to five years of historical data.
Right now.
How much credibility do you put on the driving patterns <unk> seen in the last six months.
Some people put a fair bit of credibility and took.
Aggressive rate actions, we didn't we.
It reflected risk we provided a ton of relief, but we understand that if the world changes in three to six months from now.
And we're pricing 12 months out we have to have some degree of caution as a result.
Our ability to sell is maybe not as good as it's been historically. So then there as you put all that together, Brian there is the cost of generating traffic there is how competitive.
One is and then there is how much do you think you should charge for a world that will gradually return to normal over the pricing period and you get.
A sluggish growth in commercial and personal lines in the near term, let alone. The fact that theres not much rates going around and so.
That is the issue if we could grow more in personal automobile we would because we're comfortable with.
How that business is positioned to perform in the mid to long term.
But.
The dynamics in the marketplace are.
Are such that it's not easy to grow is that then I don't know if theres anything any additional color you want to provide here.
Alright. Thank you said it right I think given.
My name is done on pause for sure it's not the main driver.
Dave I think because of data as well as our retention is holding very strong, but that's create less enrollment for shopping for a customer in that market in general and maybe I would just add we also see less new vehicle sales.
Sales versus historical.
Last few months. So that's also reducing their shopping moments for our customer.
So we believe also it's one driver of why we're seeing less people shopping for insurance than historical.
Makes sense. Thank you very much.
Your next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon, Charles It would seem to me that over the next.
12, 18 months, a lot's going to change for your company.
But one area in particular that I'm focused on is personal lines in the U K, where the change it could be the most sort of fundamental.
Glenn with Doug.
Does your company is in fact have to be a personal lines.
Player in the UK.
Is there some either regulatory reasons or maybe.
Maybe it's relevant because it helps to absorb overall cost.
In the organization, but do you think you're in fact needs to be a personal lines player in the UK at all.
Okay.
It's a key strategic question Mario you went straight to to what I think is an important.
A question and relationship with the UK keep in mind, we're number two in home insurance.
Very strong.
Pet insurance and both of these lines of business are performing really well and so I would consider that this is a position of strength to a certain extent, we're very small in motor keep in mind.
Sure.
I think 17th or 18th I forget exactly what position we are in motor is 1%.
<unk> financials revenue base, 1% motor in the UK.
So I think.
You want to make sure you are you can win in that segment.
No doubt about it but I think there are strengths in personal lines.
The exercise, we're going through with the team right now.
Is.
How do we position ourselves to win in first lines in the UK, how do we position ourselves to outperform can we win.
How do we position ourselves to outperform pricing risk selection and claims no brainer.
But then can you outperform and grow is the question and its outperformance generating adequate return on capital. These are the questions that are on the table.
Mario we closed the deal.
In June we've put in place near term profitability improvement plan auto is 1% intact financials revenue base personal lines of 7%.
Financials revenue base, there are strengths there, but we're actively engaging with the team to make sure that the business in the U K 's position, where we can win where we can outperform.
Where we can generate a return.
That compensates for the risk that we're taking and so I think your question.
It's definitely one that.
That has looked into I do think theres strength, and we want to build on that.
One sort of related question that in the UK.
Is there a bundling dynamic between auto and home.
Necessitate keeping an auto business to maintain a strong position you have in <unk>.
Pretty insurance.
No.
No much less in Canada in fact.
In Canada, we have.
Our more overlap between personal automobile home insurance in fact, we have a single product.
Four.
A single offer for both products in the Canadian marketplace in the UK.
Much greater dichotomy as our observation between both of these products. So I know from the basis of customer experience.
See the connection.
Sure.
<unk> you need both to add a solid credible personal lines platform with distributors I think that is the bigger question as opposed to whether customers look for.
Beth can you cross sell I think you can but I'm not seeing ton of evidences.
That it's been done effectively in that market.
Thank you I appreciate it.
Your next question comes from Tom Mackinnon of BMO. Please go ahead.
Yes, thanks, very much good afternoon, Sir sort of progressing a little bit on that questioning.
What have you learned now it's been probably like five months since you closed the RSA deal in particular, but you can I, what kind of businesses that have surprised you either on the upside or the downside you talk about being.
More comfortable with your RSA accretion.
Targets.
And more comfortable with achieving your cost synergy targets.
What extent are some of that attributable to.
Your outlook on the U K and I and.
Which businesses are sort of surprising or either on the upside or downside with respect to that thanks.
Yeah.
I'll ask <unk> to two <unk>.
Chip in if I start at a high level.
What are we very pleased with from an upside point of view is the quality of the people we have on the ground in the UK.
To none there is a lot of strength there.
And we want to we want to build on that.
Think that.
I'm impressed.
And thrilled.
About the a portion of <unk> that exist in the midsized commercial lines business in the UK the unfortunate tease that exist in the regions.
We built our Canadian business as a very deep local footprint.
Where are we work with brokers.
One not one but at a very deep presence in the.
Small and mid size.
Space, we ensure one in four businesses in Canada, we understand the regions, we understand the brokers and we understand the SME space.
RSA in the U K first of all Super strong, Brian very well respected.
With brokers actually last night.
Talking exactly about the competitive set in the UK and the unfortunate tease that exist in mid size and you know what I think there is a meaningful commercial lines Unfortunately and.
And the RSA team as a very strong regional franchise very strong regional platform and poorly that is an area of surprise in terms of upside not so much in terms of performance because we knew.
What the sort of performance, we were looking at coming into this transaction, but rather a size.
Size of the opportunity the areas where that need.
Works.
We had a really good sense of as well and I would put them.
In three buckets and these are three buckets, where we're focused first motor.
The performance in <unk>.
Automobile insurance.
Referred to us motor in the UK needs a lot of work and there is a lot of actions.
Focused on that to improve that performance. The second area is that the small end.
Commercial lines.
There is a fair bit of dislocation in the marketplace.
And and there's work to do on the performance of the very small end of commercial lines. We're focused on on rationalizing the footprint, there and the third bucket, which we knew would be challenging.
But we're focused on rationalizing the footprint. There is that there is a number of distribution relationships.
In both personal lines and commercial lines.
The economics are are not stacked enough in favor.
Of our operations and we're shrinking the footprint there because we need to be focused.
As a firm so these would be the three areas, where I would say upside but but.
Work is needed to create upside there and I think there's a big growth a fortunate and mid sized commercial lines in the U K.
The specialty lines business, whether it's the London market business, the marine business and so on I think the connections that we're trading now with North America.
We will give us access to a broader pool of customers and that's why the global SL capabilities. In my mind is Unfortunately I think this is an area where the competitive set as thin as far as I'm concerned the environment or the ecosystem is really conducive to.
US stepping up.
Our global capabilities.
And we're focused on that.
The numbers.
They're in line with what we thought were better and so I'll, let Louis give his perspective on that.
Thanks, Daryl so.
Yes, the numbers are better the the team in the UK was already on the path of improvement. So we're sort of trying to make sure. We keep on that path and make the corrections. We think are required here, maybe one area that is attracting a bit of attention to is the technology.
In the U K and what needs to be done to deliver on the outperformance targets, we set for ourselves, but if I come back to synergies the confidence.
It was really coming from all the markets that we've added to our platform.
You'll remember that most of the synergies are coming from Canada. So the confidence is both.
We are executing in Canada, how were executing in Europe.
And that drives the comments of.
Being feeling confident that we can beat the target of $2 50, and just we see the execution. So far I talked earlier about having $24 million already earned after four months run rate at the end of the year at $85 million. It just makes us more confident as we work closer with the teams both in Canada and the U K.
That those targets are.
Achievable and we look to try to beat them.
And as a follow on I think that $2 50 doesn't include any kind of loss ratio potential improvements, which you were able to get when you bought one beacon is there anything you can share with us just in the.
With four months of RSA in terms of any kind of loss ratio improvements.
So you are right. They are not included in the $2 50.
And I will say, we're this is really what's being done now in terms of putting our minds together developing the strategies and trying to generate.
The additional loss ratio improvement at this point.
I will say I don't think there's a lot of visibility in the very short term.
But we certainly think there's going to be some upsides in the mid to longer term.
Improve the.
Loss ratio, but we're not quantifying that yet.
Still a bit early.
Yes, I think Thats exactly right I think Tom the deal was not predicated on loss ratio improvements.
And our guidance.
Is on what the deal was predicated on clearly we have action plans.
Two.
To improve.
Performance, but.
We want to make sure that we have good visibility on it before.
Before we start putting.
Number is on the table in the meantime, I think we've been clear about the IRR now that we see on this on this transaction this should come be confidence that we're well on our way.
Okay. Thank you.
Your next question comes from Lamar parcel of Calmark. Please go ahead.
Thank you. So my first question is just continuing on the discussion on the synergies.
I'm wondering if you could help me understand which geographies are outperforming.
You're expect to expectations and most of that is there anything you can do to help us.
Ring fence around how much.
Your synergies are expected to come in at I will tell you, where I'm going with that as well.
I think back to Louis comments on $85 million run rate synergies by the end of 2021. It sounds like this outperformance can be pretty substantial extrapolated over over 36 months and then.
Also when I think back to your announcement of the deal and always felt like you assume synergies, particularly on the UK was relatively conservative in nature. So so anything you guys can offer on that would be helpful. Thanks.
So on the first part of the question. So we are tracking I would say.
Ahead of schedule.
That doesn't mean that the quantum will be hugely different than the target, we set but the timing might be a bit better than we anticipated and I say, we're giving our accretion numbers right now.
Our earlier than what we initially anticipated Youll remember our guidance was upper single by 12 months I think we are there.
Foster and where there against a strong standalone performance from IFC. So I think and this drives a bit the perception that we the IRR is a bit better than we thought at the beginning because we're we're going faster than expected, but I would not necessarily change the targets. It's just the timing at which there'll be there'll be met but I think it is growing.
After than than we had.
Dissipated.
In terms of the markets are.
Are there geographies, where they are being delivered I would.
Stick to our initial.
Guidance around three quarters being in Canada, and the rest being in the UK and you have to remember here, we did not have a business in the UK to start with to generate the synergies. So most of the synergies for that part of the acquisition were.
Head office synergies corporate common costs group costs that we could eliminate because it would become redundant but in the operations themselves harder because we didn't have an operation of our own to blend with so that's why that was heavily weighted towards towards Canada. If you look at Canada, It's six points I would say.
Combined ratio when you take the synergies we're targeting that is very consistent with the prior big acquisition, which is axa back in 2011, so it's a similar.
Similar quantum if you want and thats well on its way to being realized within the timeframe we set for ourselves.
Thank you and then my second question is just on distribution EBITDA again continues to be stronger than expected and I'm wondering if you guys.
Breakdown, how much of this growth was organic versus M&A and then.
More broadly what factors could cause us growth to slow.
So the the breakdown here just simply said if I take 29%.
Over a quarter.
Improvement two thirds of that is additional variable commissions. So two thirds is I would say pretty much organic and then a third.
As recent M&A activity.
For both our brokerage business as well as our broker financial services.
That business. So the majority of it is organic but there is a fair contribution from M&A I would say the market is fairly active these days, there's a lot of activity going on in the M&A front. So our perception that momentum will continue as supported by both the performance of the business as well as the market.
The market environment.
Thanks Thats helpful.
Yes.
Okay.
There are no further questions on the phone lines. So I will turn the conference back over to Mr. Ken Anderson for closing remarks. Please go ahead Sir.
Well, thanks, everyone for joining us today following the call a telephone replay will be available for one week and the webcast will be archived on our website for one year transcript will also be available on our website in the financial reports and filings section Lastly, our fourth quarter 2021 results are scheduled to be <unk>.
Just after market close on Tuesday February eight. Thank you again this concludes the call for today.
Okay.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
[music].